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AER Formula:
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The Annual Equivalent Rate (AER) is the interest rate for a savings account or investment product that includes compound interest. It shows what the annual interest rate would be if interest was compounded once per year, making it easier to compare different savings products.
The calculator uses the AER formula:
Where:
Explanation: The formula accounts for the effect of compounding by calculating the effective annual rate when interest is compounded multiple times throughout the year.
Details: AER provides a standardized way to compare savings accounts and investments with different compounding frequencies. It gives a true picture of the annual return, accounting for the power of compound interest.
Tips: Enter the nominal interest rate as a percentage (e.g., 5 for 5%) and the number of compounding periods per year (e.g., 12 for monthly compounding). All values must be valid (rate ≥ 0, compounding periods ≥ 1).
Q1: What Is The Difference Between AER And APR?
A: AER is used for savings and investments to show the annual return including compound interest, while APR is used for loans and credit to show the total annual cost including fees and interest.
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), weekly (52), and daily (365).
Q4: Is AER The Same As Effective Annual Rate?
A: Yes, AER is essentially the same as the effective annual rate (EAR) and is used specifically in the context of savings products in many countries.
Q5: Why Is AER Important For Savers?
A: AER allows savers to compare different savings accounts accurately, as it accounts for both the interest rate and how often interest is compounded.