But if rates are communicated annually, but compounding frequencies differ, how can we compare interest rates? For example, an annual rate of 8% compounded semi-annually is different than an annual rate of 7.8% compounded monthly. We can use the Effective Annual Rate (EAR) to compare these two scenarios. Take a look at the EAR formula in section 5-16 and calculate the EAR for the problem below: 11.75% compounded monthly Remember since this is a formula, the interest rate should be used as a decimal, and convert your answer back to a percentage with two decimals (example 5.25%)