1. What Is AER Rate?

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 each year.

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
• \( AER \) — Annual Equivalent Rate (as a decimal)

Explanation: The formula calculates the effective annual interest rate when compounding occurs multiple times per year, providing a true comparison between different financial products.

3. Importance Of AER Calculation

Details: AER allows consumers to compare different savings accounts and investment products on a like-for-like basis, regardless of their compounding frequency. It's particularly useful when comparing accounts with different compounding periods.

4. Using The Calculator

Tips: Enter the nominal interest rate as a decimal (e.g., 0.05 for 5%) and the number of compounding periods per year. 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 compounded returns, while APR is used for loans and credit to show the total cost of borrowing including fees.

Q2: Why is AER higher than the nominal rate?
A: AER accounts for the effect of compounding, where interest earned in previous periods also earns interest in subsequent periods.

Q3: 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.

Q4: When should I use AER for comparison?
A: Always use AER when comparing savings accounts, as it provides a standardized measure that accounts for different compounding frequencies.

Q5: Is AER the same as effective annual rate?
A: Yes, AER is essentially the same as the effective annual rate (EAR) and is used specifically in banking contexts for savings products.