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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 fair comparison between products with different compounding frequencies.
The calculator uses the AER formula:
Where:
Explanation: The formula calculates the effective annual interest rate by accounting for the effect of compounding interest multiple times throughout the year.
Details: AER provides a standardized way to compare different financial products with varying compounding frequencies. It helps investors and savers understand the true annual return on their investments, making it easier to choose the best financial products.
Tips: Enter the nominal interest rate as a decimal (e.g., 0.05 for 5%), and the number of compounding periods per year (e.g., 12 for monthly compounding). 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 include fees and charges in the cost calculation.
Q2: How Does Compounding Frequency Affect AER?
A: More frequent compounding results in a higher AER for the same nominal rate, as interest is calculated on previously earned interest more often.
Q3: What Are Typical Compounding Frequencies?
A: Common frequencies include annually (n=1), semi-annually (n=2), quarterly (n=4), monthly (n=12), and daily (n=365).
Q4: Can AER Be Higher Than The Nominal Rate?
A: Yes, AER is always equal to or higher than the nominal rate when compounding occurs more than once per year. Only with annual compounding are they equal.
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 accounting for compounding effects.