How do you calculate the annual equivalent rate?


Quick Answer

The formula for calculating the annual equivalent rate (AER) isAER = (1 + r/n)&supn - 1. In the formula, "r" is the stated interest, and "n" is the number of times interest is paid. Investors use AER to get a better picture of the interest earned in a year.

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Full Answer

AER adjusts for compounding interest. Compound interest is interest added to the principal for a deposit or a loan. As a result, AER is usually higher than an annual percentage rate (APR), and it gives a true picture of interest earnings, according to Investing Answers. This interest on top of interest allows a deposit or loan to grow faster. AER is a good tool for comparing investment products.

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