1. What is AER (Annual Equivalent Rate)?

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 actual annual rate you'll earn, allowing for easy comparison between 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

Explanation: The formula calculates the effective annual interest rate by accounting for the frequency of compounding, showing the true annual return on an investment.

3. Importance of AER Calculation

Details: AER is crucial for comparing different savings accounts and investment products because it standardizes the interest rates regardless of compounding frequency, giving consumers a true picture of potential returns.

4. Using the Calculator

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, 4 for quarterly, 1 for annual).

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 (what you earn), while APR is for loans and credit (what you pay).

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.