What is an annual equivalent rate (AER)?

The annual equivalent rate (AER) is the actual interest rate an investment, loan, or savings account will yield after accounting for compounding. AER is also known as the effective annual interest rate or the annual percentage yield (APY). The AER will be higher than the stated or nominal rate if there is more than one compounding period a year.

What is the difference between real interest rate & annual equivalent rate?

The real interest rate of an investment is calculated as the difference between the nominal interest rate and the inflation rate. The annual equivalent rate, or AER, is the actual interest rate on a loan when you account for how interest is compounded.

Why is the annual equivalent rate higher than the nominal rate?

The AER will always be higher than the nominal, or the stated rate, when compounding is present. The annual equivalent rate is used to compare the interest rates between loans or investments with different compounding periods, such as weekly, monthly, half-yearly, or yearly.

How do I calculate the annual equivalent rate?

There are two variables you need to know to calculate the annual equivalent rate: For n, you’ll enter 1 if the investment compounds annually, 2 for semi-annually, 4 for quarterly, 12 for monthly, and 365 for daily. The AER will always be higher than the stated interest rate unless the investment compounds annually.