Effective Annual Rate
Divide the headline rate by the number of compounding periods in a year to get one period's interest, then compound it that many times. Because interest earns interest, the effective rate always sits above the headline one.
Your numbers
Equivalent taxable rate
6.168%
Points
0.168%
Formula
Equivalent taxable rate = ((1 + Annual rate ÷ 100 ÷ n) ^ n − 1) × 100, n = 12 ÷ Months
6% compounded monthly comes to 6.168%. The gap looks small but widens as the rate climbs.
What to enter
| Input | Default | Accepted range |
|---|---|---|
| Annual rate (%)Interest quoted per year; the monthly rate is this over 12. | 6 | 0 and up |
| Months (mo)The period counted in months; a yearly rate gets divided by twelve. | 1 | 0 ~ 12 |
Step by step
Quick reference table
Results when only Annual rate (%) changes and everything else stays put.
| Annual rate (%) | Equivalent taxable rate (%) | Points (%) |
|---|---|---|
| 3 | 3.042 | 0.042 |
| 4.5 | 4.594 | 0.094 |
| 6 | 6.168 | 0.168 |
| 9 | 9.381 | 0.381 |
| 12 | 12.683 | 0.683 |
What each result means
| Result | At default values |
|---|---|
| Equivalent taxable rate (%)The taxable rate that, after tax, matches the tax-free one. | 6.168 |
| Points (%)The gap between two percentages, read in points rather than percent. | 0.168 |
Common mistakes
6% compounded monthly comes to 6.168%. The gap looks small but widens as the rate climbs.
Glossary
- Annual rate
- Interest quoted per year; the monthly rate is this over 12.
- Months
- The period counted in months; a yearly rate gets divided by twelve.
- Equivalent taxable rate
- The taxable rate that, after tax, matches the tax-free one.
- Points
- The gap between two percentages, read in points rather than percent.
Frequently asked questions
Q. How is Effective Annual Rate calculated?
Equivalent taxable rate = ((1 + Annual rate ÷ 100 ÷ n) ^ n − 1) × 100, n = 12 ÷ Months — Divide the headline rate by the number of compounding periods in a year to get one period's interest, then compound it that many times. Because interest earns interest, the effective rate always sits above the headline one.
Q. Can you walk through an example?
With Annual rate 6%, Months 1mo, the answer is Equivalent taxable rate 6.168%.
Q. What do I need to enter?
Enter Annual rate, Months. The result recalculates as you type, and an empty box counts as zero.
Q. How much does the answer move if I change a number?
Changing only Annual rate (%) moves the answer to Annual rate (%) 3 → Equivalent taxable rate (%) 3.042 and Annual rate (%) 12 → Equivalent taxable rate (%) 12.683. The table below lays out five steps.
Q. How are the numbers rounded?
Money is shown to the nearest whole unit, percentages to one decimal place and everything else to two. What you see is rounded; the calculation itself carries the unrounded value forward.
Q. Anything to watch out for?
6% compounded monthly comes to 6.168%. The gap looks small but widens as the rate climbs.
Related calculators
Tax rates and interest conventions differ by country and product — check your contract for real transactions.