1. What is Annual Equivalent Rate (AER)?

The Annual Equivalent Rate (AER) is a standardized method for comparing interest rates across different financial products, taking into account the effects of compounding. It shows the true annual return on savings or investments.

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 how often interest is compounded throughout the year.

3. Importance of AER Calculation

Details: AER allows consumers to make fair comparisons between different savings accounts and investment products, regardless of their compounding frequencies. It provides a true picture of annual returns.

4. Using the Calculator

Tips: Enter the nominal interest rate as a decimal (e.g., 0.05 for 5%), and the number of times interest compounds per year. All values must be valid (rate > 0, compounding frequency ≥ 1).

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: What are common compounding frequencies?
A: Common frequencies include annually (1), semi-annually (2), quarterly (4), monthly (12), and daily (365).

Q4: Is AER the same as APR?
A: No, AER is for savings and investments showing returns, while APR (Annual Percentage Rate) is for loans and credit showing borrowing costs.

Q5: When should I use AER for comparison?
A: Always use AER when comparing savings accounts, certificates of deposit, or any investment products with different compounding frequencies.