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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 savings products.
The calculator uses the AER formula:
Where:
Explanation: This formula accounts for the effect of compounding, showing the true annual return when interest is added to the principal multiple times per year.
Details: AER allows consumers to compare different savings accounts and investment products on a like-for-like basis, regardless of their compounding frequency. It provides a standardized measure of the annual return.
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, 4 for quarterly).
Q1: What's the difference between AER and APR?
A: AER is used for savings and investments to show compounded returns, while APR (Annual Percentage Rate) is used for loans and credit to show the total cost of borrowing.
Q2: Why is AER higher than the nominal rate?
A: AER accounts for compound interest - when interest earned also earns interest, resulting in a higher effective annual rate.
Q3: How does compounding frequency affect AER?
A: More frequent compounding (daily vs monthly) results in a higher AER for the same nominal rate, as interest is calculated and added more often.
Q4: Is AER the same as annual percentage yield (APY)?
A: Yes, AER is essentially the same concept as APY used in some countries - both represent the effective annual rate including compounding.
Q5: When comparing savings accounts, should I always choose the highest AER?
A: Generally yes, but also consider factors like account fees, withdrawal restrictions, minimum balance requirements, and the financial institution's stability.