1. What is AER?

AER (Annual Equivalent Rate) is the actual interest rate an investment, loan, or savings account will yield after accounting for compounding within a year. It provides a standardized way to compare different financial products with varying compounding frequencies.

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 calculates the effective annual rate by considering how many times the interest is compounded during the year, providing the true annual yield.

3. Importance of AER Calculation

Details: AER is crucial for comparing financial products with different compounding frequencies. It helps investors and borrowers understand the true cost or return of financial instruments, enabling better financial decision-making.

4. Using the Calculator

Tips: Enter the nominal interest rate as a decimal (e.g., 5% = 0.05), and the number of compounding periods per year. All values must be valid (nominal rate > 0, compounding periods ≥ 1).

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between nominal rate and AER?
A: Nominal rate doesn't account for compounding frequency, 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: When is AER most important to consider?
A: When comparing savings accounts, investments, or loans with different compounding schedules to find the best financial product.

Q4: Can AER be lower than the nominal rate?
A: No, AER is always equal to or greater than the nominal rate due to compounding effects.

Q5: How do I convert percentage to decimal for calculation?
A: Divide the percentage by 100 (e.g., 5% = 5/100 = 0.05).