Home
Back
AER Formula:
| From: | To: |
The AER (Annual Equivalent Rate) formula converts a flat interest rate to an effective annual rate with compounding. It provides a more accurate representation of the true cost or return of financial products when compounding is involved.
The calculator uses the AER formula:
Where:
Explanation: The formula accounts for the effect of compounding by calculating the effective annual rate that would produce the same return if interest were compounded annually.
Details: Accurate AER calculation is crucial for comparing different financial products with varying compounding frequencies, as it standardizes the comparison to an annual basis.
Tips: Enter the flat annual interest rate as a decimal (e.g., 0.05 for 5%), and the compounding frequency per year (e.g., 12 for monthly compounding). All values must be valid (rate > 0, frequency ≥ 1).
Q1: Why use AER instead of flat rate?
A: AER provides a more accurate comparison of financial products by accounting for compounding effects, while flat rate does not consider compounding frequency.
Q2: What are typical compounding frequencies?
A: Common frequencies include: 1 (annual), 2 (semi-annual), 4 (quarterly), 12 (monthly), 365 (daily).
Q3: How does compounding frequency affect AER?
A: Higher compounding frequencies result in higher AER values for the same flat rate, as interest is earned on interest more frequently.
Q4: Can AER be used for both loans and investments?
A: Yes, AER is useful for comparing both borrowing costs and investment returns across products with different compounding structures.
Q5: What's the difference between APR and AER?
A: APR (Annual Percentage Rate) typically includes fees and represents borrowing cost, while AER focuses solely on the interest rate and compounding effect for comparison purposes.