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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 the true annual rate of return, allowing for easy comparison between different financial products with varying compounding frequencies.
The calculator uses the AER formula:
Where:
Explanation: The formula calculates the effective annual interest rate by accounting for the effect of compounding within the year. More frequent compounding results in a higher AER compared to the nominal rate.
Details: AER provides a standardized way to compare different savings accounts and investment products. It reveals the true annual return, making it easier for consumers to choose the best financial products based on actual earnings potential.
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). All values must be valid (rate ≥ 0, compounding frequency ≥ 1).
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: Higher compounding frequency increases AER. For example, monthly compounding (n=12) yields a higher AER than annual compounding (n=1) with the same nominal rate.
Q3: Is AER the same as APR?
A: 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.
Q4: What are common compounding frequencies?
A: Common frequencies include: Annual (1), Semi-annual (2), Quarterly (4), Monthly (12), Weekly (52), and Daily (365).
Q5: Can AER be lower than the nominal rate?
A: No, AER is always equal to or greater than the nominal rate due to compounding effects. They are equal only when compounding occurs annually.