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AER Formula:
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The AER (Annual Equivalent Rate) is a standardized interest rate for UK savings accounts that shows what the interest rate would be if interest was paid and compounded once each year. It allows for easy comparison between different savings products.
The calculator uses the AER formula:
Where:
Explanation: The formula calculates the effective annual interest rate when compounding occurs multiple times per year, providing a true comparison of different savings accounts.
Details: AER is crucial for comparing savings accounts because it accounts for compounding frequency. Two accounts with the same nominal rate but different compounding frequencies will have different AER values and actual returns.
Tips: Enter the nominal interest rate as a percentage (e.g., 5 for 5%) and the number of times interest is compounded per year. Common compounding frequencies include 1 (annual), 4 (quarterly), 12 (monthly), or 365 (daily).
Q1: What's the difference between nominal rate and AER?
A: Nominal rate is the stated rate without compounding, while AER includes the effect of compounding and shows the actual annual return.
Q2: Why is AER important for UK savings?
A: AER is the standard measure used by UK banks and building societies, making it easy to compare different savings accounts accurately.
Q3: Does higher compounding frequency always mean higher AER?
A: Yes, for the same nominal rate, more frequent compounding results in a higher AER and better returns.
Q4: Is AER the same as APR?
A: No, AER is for savings and investments, while APR (Annual Percentage Rate) is for loans and credit, though both account for compounding.
Q5: Are there any limitations to AER?
A: AER assumes interest remains in the account and compounds, and doesn't account for taxes or changes in interest rates over time.