Learn how to calculate the effective rate of return in Excel.
The Effective Annual Return (EAR) is the annual rate per year of an investment taking into consideration compounding periods. Some investments compound monthly, quarterly, or annually.
If you have ever opened up a newspaper or watched a TV commercial, chances are you have seen ads promoting various interest rates. However, they rarely mention the expected rate of return due to compounding interest. This information is usually buried in the fine print.
Let’s look at the example below. We have an interest rate of 5.5% with 6 compounding periods in a given year.
In Excel, we use the Effect Function.
In cell B6, we enter the following formula.