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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 includes the effects of compounding. It shows what the annual interest rate would be if interest was compounded once per year, making it easier to compare different financial products.
The calculator uses the AER formula:
Where:
Explanation: The formula converts a nominal interest rate with multiple compounding periods into an equivalent annual rate that reflects the true annual return.
Details: AER provides a standardized way to compare savings accounts and investments with different compounding frequencies. It helps consumers understand the true annual return they can expect from their savings.
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). All values must be valid (rate > 0, compounding periods ≥ 1).
Q1: What's the difference between AER and APR?
A: AER is used for savings and investments to show the annual return including compounding, while APR is used for loans and credit to show the annual cost including fees and interest.
Q2: Why is AER higher than the nominal rate?
A: AER accounts for the effect of compounding, where interest earned in previous periods also earns interest, resulting in a higher effective annual rate.
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: Does AER assume reinvestment of interest?
A: Yes, AER assumes that all interest earned is reinvested at the same rate for the remainder of the year.
Q5: Is AER the same as effective annual rate (EAR)?
A: Yes, AER and EAR are essentially the same concept - both represent the true annual interest rate accounting for compounding effects.