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AER Formula:
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The Annual Equivalent Rate (AER) is the interest rate for a savings account that shows what the interest rate would be if interest was paid and compounded once each year. It allows for easy comparison between savings accounts with different compounding periods.
The calculator uses the AER formula:
Where:
Explanation: The formula calculates the effective annual rate by accounting for the effect of compounding interest throughout the year.
Details: AER provides a standardized way to compare different savings accounts and investment products, ensuring you can make informed decisions about where to place your money for optimal returns.
Tips: Enter the nominal interest rate as a percentage (e.g., 5 for 5%) and the number of times interest is compounded per year. All values must be valid (interest rate ≥ 0, compounding periods ≥ 1).
Q1: What's the difference between AER and APR?
A: AER is used for savings accounts and shows the effect of compounding on interest earned, while APR is used for loans and includes fees to show the true cost of borrowing.
Q2: Why is AER important for savers?
A: AER allows you to compare different savings accounts fairly, as it accounts for how often interest is paid and compounded.
Q3: Does more frequent compounding always mean higher AER?
A: Yes, for the same nominal rate, more frequent compounding results in a higher AER due to the compounding effect.
Q4: How does AER affect my actual returns?
A: AER represents the actual percentage return you'll earn on your savings over one year, taking compounding into account.
Q5: Is AER the same as annual percentage yield (APY)?
A: Yes, AER and APY are essentially the same concept - both represent the effective annual rate of return taking compounding into consideration.