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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 what the annual interest rate would be if interest was compounded once per year, allowing for easy comparison between different financial products.
The calculator uses the AER formula:
Where:
Explanation: The formula calculates the effective annual interest rate by accounting for the effect of compounding interest more frequently than once per year.
Details: AER provides a standardized way to compare different savings accounts and investment products, as it reflects the true annual return when compounding is considered. This helps consumers make informed financial decisions.
Tips: Enter the nominal interest rate as a percentage and the number of compounding periods per year (e.g., 12 for monthly, 4 for quarterly, 365 for daily). Both values must be positive numbers.
Q1: What Is The Difference Between AER And APR?
A: AER is used for savings and investments to show the effect of compounding, while APR (Annual Percentage Rate) 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 is higher because it accounts for the effect of compounding - earning interest on previously earned interest throughout the year.
Q3: How Often Is Interest Typically Compounded?
A: Common compounding frequencies include daily, monthly, quarterly, or annually, depending on the financial institution and product type.
Q4: Does AER Assume Reinvestment Of Interest?
A: Yes, AER assumes that all interest earned is reinvested at the same rate for the remainder of the year.
Q5: Is AER The Same As Effective Annual Rate (EAR)?
A: Yes, AER and EAR are essentially the same concept - both represent the effective annual interest rate when compounding is considered.