1. What is AER (Annual Equivalent Rate)?

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 interest rate would be if interest was paid and compounded once each year, providing a true like-for-like comparison between different financial products.

2. How Does the Calculator Work?

The calculator uses the AER formula:

Where:

• \( r \) — Nominal annual interest rate (as a decimal)
• \( n \) — Number of compounding periods per year

Explanation: The formula calculates the effective annual rate by accounting for how many times interest is compounded within the year, giving you the true annual return on your 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 how frequently interest is paid. This allows consumers to make informed decisions about where to place their money for the best returns.

4. Using the Calculator

Tips: Enter the nominal interest rate as a percentage (e.g., 5 for 5%) and the number of times interest is compounded per year (e.g., 12 for monthly compounding). All values must be valid (rate ≥ 0, compounding frequency ≥ 1).

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between AER and APR?
A: AER is used for savings and investments to show the return you'll receive, while APR (Annual Percentage Rate) is used for loans and credit to show the total cost of borrowing.

Q2: Why is AER higher than the nominal rate?
A: AER accounts for compound interest - the interest you earn on previously earned interest. The more frequently interest is compounded, the higher the AER will be compared to the nominal rate.

Q3: Is AER the same as EAR?
A: Yes, AER (Annual Equivalent Rate) is essentially the same as EAR (Effective Annual Rate). Both terms describe the true annual interest rate when compounding is taken into account.

Q4: How does compounding frequency affect AER?
A: The more frequently interest is compounded (daily, monthly, quarterly), the higher the AER will be compared to the nominal rate, as interest is calculated on a growing balance more often.

Q5: Should I always choose the product with the highest AER?
A: While AER is an important factor, also consider withdrawal restrictions, minimum deposit requirements, and the financial institution's stability when choosing a savings product.