1. What Is 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, allowing easy comparison between different financial products.

2. How Does The Calculator Work?

The calculator uses the AER formula:

Where:

• \( r \) — Nominal annual interest rate (as a decimal)
• \( n \) — Number of compounding periods per year

Explanation: The formula calculates the effective annual rate by accounting for how often interest is compounded throughout the year.

3. Importance Of AER Calculation

Details: AER provides a standardized way to compare different savings accounts and investments, especially when they have different compounding frequencies. It shows the actual return you can expect over one year.

4. Using The Calculator

Tips: Enter the nominal interest rate as a percentage (e.g., 5 for 5%) and the number of times interest compounds per year (e.g., 12 for monthly compounding).

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between nominal rate and AER?
A: Nominal rate doesn't account for compounding, while AER shows the actual annual return 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: Is AER the same as APR?
A: No, AER is for savings and investments (showing return), while APR is for loans and credit (showing borrowing cost).

Q4: When is AER most useful?
A: When comparing savings accounts with different compounding frequencies or when you want to know the true annual return on an investment.

Q5: Can AER be lower than the nominal rate?
A: No, AER is always equal to or higher than the nominal rate due to compounding effects.