1. What Is AER?

AER (Annual Equivalent Rate) represents the actual annual interest rate when compounding is taken into account. 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 decimal)
• \( n \) — Number of compounding periods per year

Explanation: The formula calculates the effective annual rate by accounting for the effect of compounding interest throughout the year.

3. Importance Of AER Calculation

Details: AER is crucial for comparing different financial products like savings accounts, loans, and investments. It provides a true picture of annual returns by considering compounding effects.

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 (r > 0, n ≥ 1).

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between AER and APR?
A: AER shows the annual rate with compounding for savings/investments, while APR includes fees and charges for loans/credit.

Q2: Why is AER higher than the nominal rate?
A: AER accounts for compounding - interest earned on previous interest - which increases the effective rate.

Q3: How does compounding frequency affect AER?
A: More frequent compounding (higher n) results in a higher AER for the same nominal rate.

Q4: Is AER the same as effective annual rate?
A: Yes, AER and effective annual rate (EAR) are essentially the same concept.

Q5: When should I use AER vs nominal rate?
A: Always use AER when comparing different financial products to get an accurate comparison of annual returns.