1. What is AER (Annual Equivalent 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 once per year, allowing for easy comparison between different financial products.

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

Explanation: The formula calculates the effective annual interest rate by accounting for the effect of compounding throughout the year.

3. Importance of AER Calculation

Details: AER provides a standardized way to compare different savings accounts and investment products, especially when they have different compounding frequencies. It gives a true picture of the annual return on your investment.

4. Using the Calculator

Tips: Enter the nominal interest rate as a percentage (e.g., 5 for 5%), and the number of times interest is compounded per year (e.g., 12 for monthly compounding).

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between nominal rate and AER?
A: Nominal rate doesn't account for compounding, while AER shows the actual annual return including compounding effects.

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: When is AER most useful?
A: When comparing savings accounts, certificates of deposit, or any investment products with different compounding frequencies.

Q4: Is AER the same as APR?
A: No, APR (Annual Percentage Rate) typically refers to borrowing costs, while AER refers to investment returns. Both account for compounding but in different contexts.

Q5: Can AER be lower than the nominal rate?
A: No, AER is always equal to or higher than the nominal rate due to the compounding effect.