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AER Formula:
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The AER (Annual Equivalent Rate) calculator determines the true annual interest rate for savings accounts, accounting for compounding frequency. It allows for fair comparison between different savings products with varying compounding periods.
The calculator uses the AER formula:
Where:
Explanation: The formula calculates the effective annual rate by considering how often interest is added to your savings throughout the year.
Details: AER provides a standardized way to compare savings accounts with different compounding frequencies. It shows the actual return you can expect over one year, making it easier to choose the best savings option.
Tips: Enter the nominal interest rate as a decimal (e.g., 0.05 for 5%), and the number of times interest compounds per year. All values must be valid (rate > 0, compounds ≥ 1).
Q1: What's the difference between AER and APR?
A: AER is for savings and investments, showing the return you'll earn. APR is for borrowing, showing the total cost of credit including fees and interest.
Q2: Why is AER important for savings comparisons?
A: Accounts with the same nominal rate but different compounding frequencies will have different AERs. Higher compounding frequency means higher AER and better returns.
Q3: How often do savings accounts typically compound?
A: Common compounding frequencies include daily, monthly, quarterly, and annually. Daily compounding usually provides the highest AER for the same nominal rate.
Q4: Is AER the same as the interest rate I'll actually earn?
A: Yes, AER represents the actual annual return you'll receive, assuming you don't withdraw any money and the interest rate remains constant.
Q5: Can AER be lower than the nominal rate?
A: No, AER is always equal to or higher than the nominal rate. It can only be equal if interest compounds annually.