Effective annual rate (E.A.R.) converts stated rate to annual equivalent when compounding occurs multiple times. Formula: E.A.R. = (1 + r/(100m))^m - 1, where m = compounding frequency. Example: 12% p.a. compounded quarterly. E.A.R. = (1 + 0.12/4)^4 - 1 = (1.03)^4 - 1 = 0.1255 or 12.55%. Monthly: (1 + 0.12/12)^12 - 1 ≈ 0.1268 or 12.68%. For comparison: Higher frequency = higher E.A.R. Useful for: Comparing different investment/loan offers with different frequencies. Shortcut: More frequent compounding benefits savers, hurts borrowers. Exam tip: Always compute E.A.R. for fair comparison. State result as percentage with 2-3 decimal places.