Annual Equivalent Rate (AER) Calculator

Formula

The formula to calculate the Annual Equivalent Rate (AER) is:

\[ \text{AER} = \left(1 + \frac{r}{n}\right)^n - 1 \]

Where:

Equivalent Rates: An equivalent rate, commonly described in terms of an annual basis, is the equivalent interest that an investor earns on an investment due to compounding. For example, if an investment pays out interest on a monthly basis, then the AER would be the total equivalent return rate for the entire year.

Let's say the stated interest rate is 5% (0.05) and the interest is compounded monthly (12 times a year). Using the formula:

\[ \text{AER} = \left(1 + \frac{0.05}{12}\right)^{12} - 1 = 0.0512 \, \text{or} \, 5.12\% \]

So, the annual equivalent rate is approximately 5.12%.