1. What is Annual Equivalent Rate (AER)?

The Annual Equivalent Rate (AER) is the interest rate for a savings account or investment product when compound interest is taken into account. It shows what the interest rate would be if interest was paid and compounded once each year, and helps you compare savings accounts and investment products that pay interest at different frequencies.

2. How Does the Calculator Work?

The calculator uses the AER formula:

Where:

• \( r \) — Nominal interest rate (as a decimal)
• \( n \) — Number of compounding periods per year

Explanation: The formula calculates the effective annual interest rate by accounting for the effect of compounding interest over multiple periods within a year.

3. Importance of AER Calculation

Details: AER provides a standardized way to compare different financial products with varying compounding frequencies. It gives a true picture of the annual return on your investment or savings, making it easier to choose the best financial product for your needs.

4. Using the Calculator

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, 4 for quarterly). All values must be valid (nominal rate ≥ 0, compounding periods ≥ 1).

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between AER and APR?
A: AER is used for savings and investments to show the effect of compounding, while APR (Annual Percentage Rate) is used for loans and credit to show the total cost of borrowing including fees.

Q2: Why is AER important for savers?
A: AER allows you to compare savings accounts with different compounding frequencies on an equal basis, helping you choose the account that will give you the best return.

Q3: Does higher compounding frequency 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 tax affect AER calculations?
A: The AER calculation shown is pre-tax. For after-tax returns, you would need to apply your applicable tax rate to the interest earned.

Q5: Can AER be used for investment products?
A: Yes, AER is commonly used for savings accounts, certificates of deposit, and other fixed-income investments to compare returns across different compounding schedules.