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Annual Equivalent Rate Formula:
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The Annual Equivalent Rate (AER) is the interest rate for a savings account or investment product that has more than one compounding period per year. It shows what the annual interest rate would be if interest was compounded only once per year, allowing for easy comparison between different financial 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 different savings accounts and investment products that may have different compounding frequencies. It gives consumers a true picture of the annual return they can expect.
Tips: Enter the nominal annual 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's the difference between nominal rate and AER?
A: The nominal rate doesn't account for compounding frequency, while AER shows the effective annual rate 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), weekly (52), and daily (365).
Q4: Is AER the same as APY?
A: Yes, AER is essentially the same as Annual Percentage Yield (APY) used in some countries, both representing the effective annual rate including compounding.
Q5: When is AER most useful?
A: AER is particularly useful when comparing savings accounts, certificates of deposit, or any investment products with different compounding schedules.