1. What is Annual Equivalent Rate (AER)?

The Annual Equivalent Rate (AER) is the interest rate for a savings account or investment product when compounding is taken into account. It shows what the annual interest rate would be if interest was compounded and paid once per year.

2. How Does the Calculator Work?

The calculator uses the AER formula:

Where:

• \( AER \) — Annual Equivalent Rate (%)
• \( GR \) — Gross Rate (%)
• \( 12 \) — Number of compounding periods per year (monthly)

Explanation: The formula converts a monthly gross rate to an annual equivalent rate by accounting for the effects of monthly compounding over a full year.

3. Importance of AER Calculation

Details: AER allows for easy comparison between different savings accounts and investment products with varying compounding frequencies. It provides a standardized way to understand the true annual return on your money.

4. Using the Calculator

Tips: Enter the gross monthly rate as a percentage (e.g., for 1.5% monthly rate, enter 1.5). The calculator will compute the equivalent annual rate with monthly compounding.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between AER and APR?
A: AER is used for savings and investments to show compounded returns, while APR 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 savers to compare different savings accounts on a like-for-like basis, regardless of how often interest is paid or compounded.

Q3: Does AER assume interest is reinvested?
A: Yes, AER assumes that any interest earned is reinvested and earns interest in subsequent periods (compounding).

Q4: Can AER be lower than the gross rate?
A: No, AER is always equal to or higher than the gross rate due to the effects of compounding.

Q5: How often is interest typically compounded?
A: Common compounding frequencies include daily, monthly, quarterly, and annually, with more frequent compounding resulting in higher AER.