Effective Rate of Return Calculator
Calculate the true Annual Percentage Yield (APY) considering compounding, inflation, and taxes.
Annually (1/yr)
Semi-Annually (2/yr)
Quarterly (4/yr)
Monthly (12/yr)
Bi-Weekly (26/yr)
Weekly (52/yr)
Daily (365/yr)
Effective Annual Rate (EAR):
0.00%
After-Tax Effective Rate:
0.00%
Real Rate of Return (Inflation Adjusted):
0.00%
Understanding Effective Rate of Return
The Effective Rate of Return (often referred to as the Annual Percentage Yield or APY) is a measurement of the true return on an investment. Unlike the nominal interest rate, the effective rate accounts for the effects of compounding periods within the year.
Furthermore, to understand the true "purchasing power" gain of your investment, it is crucial to adjust for taxes and inflation. This calculator performs three layers of analysis:
- EAR (Effective Annual Rate): Converts the nominal rate and compounding frequency into a single annual yield.
- After-Tax Return: Deducts the portion of earnings owed to taxes.
- Real Rate of Return: Adjusts the final number for inflation, showing the actual increase in purchasing power.
The Formula
The core formula for the Effective Annual Rate (EAR) is:
EAR = (1 + r/n)n – 1
Where:
- r = Nominal annual interest rate (decimal)
- n = Number of compounding periods per year
Example Calculation
Suppose you invest in a bond with a 6% nominal rate that compounds monthly.
- Nominal Rate (r) = 0.06
- Compounding (n) = 12
- EAR = (1 + 0.06/12)12 – 1 = 1.06168 – 1 = 6.17%
If you have a 25% tax rate and inflation is 3%:
- After-Tax Return = 6.17% × (1 – 0.25) = 4.63%
- Real Return = ((1 + 0.0463) / (1 + 0.03)) – 1 = 1.58%
This demonstrates how taxes and inflation can significantly reduce a nominal 6% return down to a real return of just 1.58%.