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AER Formula:
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The Annual Equivalent Rate (AER) is the interest rate for a savings account or investment product when compounding is taken into account. It shows what the annual interest rate would be if interest was compounded once per year, allowing for easy comparison between different financial products.
The calculator uses the AER formula:
Where:
Explanation: The formula converts a nominal interest rate with multiple compounding periods into an equivalent annual rate that accounts for the effect of compounding.
Details: AER provides a standardized way to compare different savings accounts and investment products that may have different compounding frequencies. It gives consumers a true picture of the annual return they can expect.
Tips: Enter the nominal interest rate as a percentage (e.g., 5 for 5%) and the number of compounding periods per year (e.g., 12 for monthly compounding). Both values must be positive numbers.
Q1: What's the difference between nominal rate and AER?
A: The nominal rate doesn't account for compounding frequency, while AER shows the actual annual return including compounding effects.
Q2: How does compounding frequency affect AER?
A: More frequent compounding results in a higher AER for the same nominal rate, as interest is calculated on previously earned interest more often.
Q3: What are common compounding periods?
A: Common periods include: annually (1), semi-annually (2), quarterly (4), monthly (12), weekly (52), and daily (365).
Q4: Is AER the same as APR?
A: No, AER is used for savings and investments to show returns, while APR (Annual Percentage Rate) is used for loans and credit to show borrowing costs.
Q5: When is AER most useful?
A: AER is particularly useful when comparing savings accounts with different compounding frequencies or when evaluating long-term investment growth.