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AER Formula:
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The Annual Equivalent Rate (AER) is the interest rate for a savings account that shows what the interest rate would be if interest was paid and compounded once each year. It allows for easy comparison between savings accounts with different compounding periods.
The calculator uses the AER formula:
Where:
Explanation: The formula calculates the effective annual interest rate when compounding occurs more than once per year, providing a standardized way to compare different savings products.
Details: AER is crucial for comparing savings accounts and investments because it accounts for the effects of compounding. It provides a true picture of the return you can expect over one year.
Tips: Enter the nominal interest rate as a decimal (e.g., 0.05 for 5%), and the number of compounding periods per year. All values must be valid (rate > 0, compounding periods ≥ 1).
Q1: What's the difference between AER and APR?
A: AER is used for savings and investments to show the effect of compounding, while APR is used for loans and credit to show the total cost of borrowing.
Q2: Why is AER important for savers?
A: AER allows you to compare different savings accounts fairly, regardless of how often they pay interest (daily, monthly, quarterly, etc.).
Q3: How does compounding frequency affect AER?
A: The more frequently interest is compounded, the higher the AER will be for the same nominal rate.
Q4: Should I always choose the account with the highest AER?
A: Generally yes, but also consider factors like accessibility, fees, and minimum balance requirements.
Q5: Is AER the same as the actual return I'll get?
A: Yes, AER represents the actual annual return you'll receive if you don't withdraw any money during the year.