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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 interest throughout the year.
Details: AER provides a standardized way to compare different savings accounts and investment products, as it reflects the actual return you'll earn after compounding. This is crucial for making informed financial decisions and maximizing returns.
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 (nominal rate ≥ 0, compounding periods ≥ 1).
Q1: What's the difference between nominal rate and AER?
A: Nominal rate doesn't account for compounding, 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 and added more often.
Q3: What are common compounding frequencies?
A: Annual (1), Semi-annual (2), Quarterly (4), Monthly (12), Weekly (52), Daily (365).
Q4: Is AER the same as APR?
A: AER is used for savings and investments, while APR (Annual Percentage Rate) is typically used for loans and credit products.
Q5: Why is AER important for savers?
A: AER allows savers to accurately compare different savings accounts and choose the one that offers the best return, regardless of compounding frequency differences.