What is an annual equivalent rate (AER)?

The annual equivalent rate (AER), or effective annual interest rate, is the interest rate on a loan or financial product that is adjusted for compounding over a year. In other words, the effective annual interest rate is the rate of interest that you can earn in a year after considering the compounding effect.

What is the equivalent rate of a nominal annual interest rate?

Assuming an individual want to see which is the equivalent rate of a nominal annual interest rate of 4.5% compounded monthtly (m = 12), versus compounded semi-anually (n = 2). If you simplu input the data within this calculator you will get these figures: The equivalent interest rate considering the new compouding frequency is 4.5424%

What is the annual equivalent rate of 5% compounded monthly?

For example, the annual equivalent rate of an investment having a nominal interest rate of 5% compounded monthly is equivalent to 5.116%. 5% compounded monthly has a periodic rate of 5/12 ≈ 0.4166%. After one year, the initial capital is increased by a factor of (1 + 0.004166)12 ≈ 1.05116, which means AER = 5.116%.

What is an effective annual interest rate?

In other words, the effective annual interest rate is the rate of interest that you can earn in a year after considering the compounding effect. For example, the annual equivalent rate of an investment having a nominal interest rate of 5% compounded monthly is equivalent to 5.116%. 5% compounded monthly has a periodic rate of 5/12 ≈ 0.4166%.