Effective annual rate, or EAR, expresses what an investment or loan actually earns or costs over a year once intra-year compounding is counted. The EAR formula is (1 + i/n)^n - 1, where i is the stated annual rate and n is the number of compounding periods per year. A quoted 8 percent rate compounded monthly, for example, works out to an EAR of about 8.30 percent, because each month's interest itself earns interest for the rest of the year.
The measure exists to put rates quoted on different compounding schedules on equal footing: a savings account compounding daily, a bond paying semiannually, and a private credit position compounding monthly cannot be compared on stated rates alone. The same logic applies inside private deals, where a preferred return that compounds is worth more than the same stated rate paid simple, a mechanic explained in how preferred return works in real estate syndications. Real estate investors most often reach for EAR when weighing quoted yields on cash and fixed income against projected property-level returns, a comparison covered in this overview of common real estate return metrics.
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