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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 accounts for the effect of compounding by calculating the effective annual rate when interest is compounded multiple times per year.
Details: AER provides a standardized way to compare different savings accounts and investment products. It's particularly important when comparing accounts with different compounding frequencies (daily, monthly, quarterly, etc.).
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, 1 for annual).
Q1: How is AER calculated on savings?
A: AER is calculated by taking the nominal interest rate and adjusting it for the frequency of compounding using the formula AER = (1 + r/n)^n - 1.
Q2: What's the difference between AER and APR?
A: AER is used for savings and investments to show the return including compounding, while APR (Annual Percentage Rate) is used for loans and credit to show the total cost of borrowing.
Q3: Why is AER higher than the nominal rate?
A: AER is higher because it accounts for compound interest - you earn interest on previously earned interest, which increases the effective return.
Q4: Does more frequent compounding always mean higher AER?
A: Yes, for the same nominal rate, more frequent compounding results in a higher AER, though the difference becomes smaller as compounding frequency increases.
Q5: Is AER the same as effective annual rate?
A: Yes, AER and effective annual rate (EAR) are essentially the same concept - both represent the true annual return accounting for compounding.