1. What is the Annual Equivalent Rate (AER)?

The Annual Equivalent Rate (AER) is the interest rate for a savings account or investment product when compounding is taken into account. It shows the true annual return on your savings, making it easier to compare different financial products.

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
• \( AER \) — Annual Equivalent Rate (as a decimal)

Explanation: The formula accounts for the effect of compounding, showing how interest earned in one period earns additional interest in subsequent periods.

3. Importance of AER Calculation

Details: AER provides a standardized way to compare savings accounts and investments with different compounding frequencies. It shows the actual annual return you can expect to earn.

4. Using the Calculator

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).

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between AER and APR?
A: AER shows the annual return on savings and investments, while APR shows the annual cost of borrowing including fees and charges.

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: Does more frequent compounding always mean higher returns?
A: Generally yes, but the difference becomes smaller as compounding frequency increases. The biggest jump is from annual to semi-annual compounding.

Q4: How do I convert a percentage rate to decimal?
A: Divide the percentage by 100. For example, 5% becomes 0.05, 2.5% becomes 0.025.

Q5: Is AER the same as effective annual rate?
A: Yes, AER is essentially the same as the effective annual rate (EAR) and is used to show the true annual return on savings products.