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AER Formula:
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The Annual Equivalent Rate (AER) is the effective annual interest rate that accounts for compounding within the year. It represents the actual annual return on an investment or savings account, providing a standardized way to compare different financial products with varying compounding frequencies.
The calculator uses the AER formula:
Where:
Explanation: The formula calculates the effective annual rate by considering how many times the interest is compounded during the year, giving you the true annual yield.
Details: AER is crucial for comparing different savings accounts, investments, and loans because it standardizes the interest rates regardless of compounding frequency. It helps consumers make informed financial decisions by showing the true 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, 4 for quarterly, 1 for annual). All values must be valid (rate > 0, compounding periods ≥ 1).
Q1: What's the difference between nominal rate and AER?
A: Nominal rate doesn't account for compounding frequency, 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: AER is particularly useful when comparing savings accounts, certificates of deposit, and investments 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 due to the compounding effect.
Q5: How do I convert percentage to decimal for the calculator?
A: Divide the percentage by 100 (e.g., 5% becomes 0.05, 2.5% becomes 0.025).