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Interest Formula:
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Annual Equivalent Rate (AER) interest represents the annual interest rate that accounts for compounding effects. It provides a standardized way to compare different savings and investment products by showing the true annual return.
The calculator uses the simple interest formula:
Where:
Explanation: This formula calculates the simple interest earned on a principal amount over a specified time period using the annual equivalent rate.
Details: Accurate interest calculation is essential for financial planning, comparing savings accounts, understanding investment returns, and making informed decisions about personal finances.
Tips: Enter principal amount in pounds, AER as a decimal (e.g., 0.05 for 5%), and time in years. All values must be positive numbers.
Q1: What is the difference between AER and APR?
A: AER (Annual Equivalent Rate) is used for savings and investments to show the annual return including compounding, while APR (Annual Percentage Rate) is used for loans and credit to show the annual cost of borrowing.
Q2: How do I convert percentage AER to decimal?
A: Divide the percentage by 100. For example, 5% AER becomes 0.05 as a decimal.
Q3: Does this calculator account for compound interest?
A: This calculator uses the simple interest formula. For compound interest calculations, a different formula accounting for compounding frequency would be needed.
Q4: What is a typical AER for savings accounts?
A: AER rates vary by institution and economic conditions, typically ranging from 0.5% to 5% for standard savings accounts, with higher rates for fixed-term deposits.
Q5: Can I use this for partial years?
A: Yes, you can enter fractional years (e.g., 0.5 for 6 months, 1.25 for 15 months) to calculate interest for partial year periods.