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 what the annual interest rate would be if interest was compounded once per year, allowing for easy comparison between different financial products.

2. How Does the Calculator Work?

The calculator uses the AER formula:

Where:

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

Explanation: The formula converts a nominal interest rate with multiple compounding periods into an equivalent annual rate that accounts for the effect of compounding.

3. Importance of AER Calculation

Details: AER is crucial for comparing different savings accounts and investment products because it standardizes interest rates regardless of their compounding frequency. It gives consumers a true picture of potential earnings.

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 positive numbers.

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 effect of compounding, while APR (Annual Percentage Rate) is used for loans and credit to show the total cost of borrowing including fees.

Q2: Why is AER higher than the nominal rate?
A: AER accounts for compound interest - the interest earned on previously accumulated interest - which makes the effective annual rate higher than the simple nominal rate.

Q3: How does compounding frequency affect AER?
A: More frequent compounding (daily vs monthly vs annually) results in a higher AER for the same nominal rate, as interest is calculated and added more often.

Q4: Is AER the same as effective annual rate?
A: Yes, AER is essentially the same as the effective annual rate (EAR) and is used specifically in the context of savings and investment products in many countries.

Q5: When should I use AER for comparison?
A: Always use AER when comparing savings accounts, certificates of deposit, or any investment products with different compounding frequencies to get an accurate comparison of potential returns.