1. What is Annual Equivalent Rate?

The Annual Equivalent Rate (AER) calculates the effective annual interest rate when compounding occurs more than once per year. It provides a standardized way to compare different financial products with varying compounding frequencies.

2. How Does the Calculator Work?

The calculator uses the AER formula:

Where:

• \( r \) — Nominal interest rate (expressed as a decimal)
• \( n \) — Number of compounding periods per year
• \( AER \) — Annual equivalent rate (expressed as a decimal)

Explanation: The formula accounts for the effect of compounding by calculating the total interest earned when interest is compounded multiple times within a year.

3. Importance of AER Calculation

Details: AER is crucial for comparing different financial products like savings accounts, loans, and investments that have different compounding frequencies. It provides a true picture of the annual return or cost.

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. Both values must be valid (nominal rate ≥ 0, compounds/year ≥ 1).

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between nominal rate and AER?
A: Nominal rate is the stated annual rate without compounding, while AER includes the effect of compounding throughout the year.

Q2: How does compounding frequency affect AER?
A: Higher compounding frequencies result in higher AER values for the same nominal rate, due to the "interest on interest" effect.

Q3: When is AER most useful?
A: When comparing savings accounts, certificates of deposit, loans, or any financial products with different compounding schedules.

Q4: Can AER be lower than the nominal rate?
A: No, AER is always equal to or greater than the nominal rate when compounding occurs. It equals the nominal rate only when compounded annually.

Q5: How do I convert percentage to decimal for input?
A: Divide the percentage by 100 (e.g., 5% becomes 0.05, 3.25% becomes 0.0325).