Effective annual rate
(EAR).
1.
A quoting convention under which interest at the quoted rate is calculated and added to the principal annually.
EAR is the usual quotation basis for instruments with maturities of greater than one year.
2.
A conventional measure which expresses the returns on different instruments on a comparable basis.
The EAR basis of comparison is the equivalent rate of interest paid and compounded annually, which would give the same all-in rate of return as the instrument under review.
Example
GBP overnight interest is conventionally quoted on a simple interest basis for a 365 day year.
So GBP overnight interest quoted at 5.11% means:
(i)
Interest of 5.11% / 365
= 0.014% is paid per day.
(ii)
The equivalent effective annual rate is
= 1.00014365 - 1
= 5.24%.
