1. What is the Annual Equivalent Rate (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 rate of return, allowing for easy comparison between 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 interest rate by accounting for the effect of compounding within the year.

3. Importance of AER Calculation

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

4. Using the Calculator

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

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). Both account for compounding but in different contexts.

Q4: When is AER most useful?
A: When comparing savings accounts with different interest payment frequencies or when evaluating long-term investment returns.

Q5: Does AER account for fees or taxes?
A: No, AER only reflects the compounding effect. Actual returns may be lower due to account fees, taxes, or other charges.