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AER Formula:
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The AER (Annual Equivalent Rate) vs Gross Calculator compares the annual equivalent rate to the nominal gross rate, taking into account the effect of compounding periods throughout the year. It helps investors understand the true annual return on their investments.
The calculator uses the AER formula:
Where:
Explanation: The formula accounts for the compounding effect, showing how frequently compounded interest increases the effective annual return compared to the simple gross rate.
Details: AER provides a standardized way to compare different financial products with varying compounding frequencies. It shows the true annual return investors can expect, making it easier to compare savings accounts, investments, and loans.
Tips: Enter the gross rate as a decimal (e.g., 0.05 for 5%), and the number of compounding periods per year (e.g., 12 for monthly compounding). All values must be valid positive numbers.
Q1: What is the difference between AER and gross rate?
A: Gross rate is the nominal interest rate without compounding, while AER includes the effect of compounding and represents the true annual return.
Q2: When is AER higher than gross rate?
A: AER is always equal to or higher than the gross rate when there are multiple compounding periods. The difference increases with more frequent compounding.
Q3: What are common compounding periods?
A: Common periods include: 1 (annual), 2 (semi-annual), 4 (quarterly), 12 (monthly), 365 (daily).
Q4: Why is AER important for investors?
A: AER allows investors to compare different financial products on an equal basis, regardless of their compounding frequencies, ensuring fair comparisons.
Q5: Can AER be used for loans and credit cards?
A: Yes, AER can also represent the effective annual cost of borrowing, helping consumers compare different loan and credit card offers.