What is the 'Annual Equivalent Rate  AER'
The annual equivalent rate (AER) is interest that is calculated under the assumption that any interest paid is combined with the original balance and the next interest payment will be based on the slightly higher account balance. Overall, this means that interest can be compounded several times in a year depending on the number of times that interest payments are made.
BREAKING DOWN 'Annual Equivalent Rate  AER'
In the United Kingdom, the amount of interest received from savings accounts is listed in AER form.The AER is calculated as:
Where:
n = number of times a year that interest is paid
r = gross interest rate
The annual equivalent rate uses the same formula to calculate the amount of interest as the annual percentage yield (APY). The AER indicates the amount of interest that has been earned over a specified period. Contrary to the AER, the equivalent annual rate (EAR) is quoted when borrowing money and gives borrowers an idea of the borrowing costs if the borrower remained overdrawn for one year.
Annual Equivalent Rate Calculation and Interpretation
Similar to the APY, the AER takes into the effects of compounding and measures the amount an account would earn. Moreover, the AER could be used to determine which banks offer better rates and which banks may be attractive investments. Investors should be aware that the annual equivalent rate will typically be higher than the actual annual rate calculated without compounding.
For example, assume an investor wishes to sell all the securities in her investment portfolio and place all her proceeds in a savings account. The investor is deciding between placing her proceeds in either bank A, bank B or bank C, depending on the highest rate offered. Bank A has a quoted interest rate of 3.7% that pays interest on an annual basis. Bank B has a quoted interest rate of 3.65% that pays interest quarterly and Bank C has a quoted interest rate of 3.7% that pays interest semiannually.
Therefore, bank A would have an annual equivalent rate of 3.7%, or ((1 + (0.037) / 1) ^ 1)  1. Bank B has an AER of 3.7%, or ((1 + (0.0365) / 4) ^ 4)  1, which equivalent to that of bank A even though bank B is compounded quarterly. Therefore, the investor would be indifferent between placing her cash in bank A or bank B. On the other hand, bank C has that same interest rate as bank A, but bank C pays interest semiannually. Consequently, bank C has an AER of 3.73%, which is more attractive than the other two banks.

Interest Rate
Interest rate is the amount charged, expressed as a percentage ... 
Effective Annual Interest Rate
Effective Annual Interest Rate is an investment's annual rate ... 
Compound Interest
Compound Interest is interest calculated on the initial principal ... 
Discrete Compounding
Discrete compounding refers to the method by which interest is ... 
Stated Annual Interest Rate
A stated annual interest rate is the return on an investment ... 
Anticipated Interest
The amount of interest that a savings vehicle will accrue by ...

Personal Finance
How Interest Rates Work on Savings Accounts
Here's what you need to know to grow your rainyday fund. 
Investing
Learn Simple and Compound Interest
Interest is defined as the cost of borrowing money or the rate paid on a deposit to an investor. Interest can be classified as simple interest or compound interest. 
Investing
The Interest Rates: APR, APY And EAR
When most people shop for financial products, all they focus on is the listed interest rate. Human eyes instinctively dismiss the fine print, which usually includes the terms APR (annual percentage ... 
Personal Finance
Bank Profitability in the Era of Low Interest Rates
The "lowforlong" policy on interest rates presents a major challenge to bank profitability. 
Investing
How Negative Interest Rates Can Affect Banks' Bottom Lines
Examine the impacts of low interest rates on banking industry profits and find out if negative interest rates will have a more extreme effect. 
Personal Finance
Simple Interest Loans: Do They Exist?
Yes, they do. Here is what they are – and how to use them to your advantage. 
Investing
Analyzing A Bank's Financial Statements
A careful review of a bank's financial statements can help you identify key factors in a potential investment. 
Investing
4 Ways Simple Interest Is Used In Real Life
Simple interest works in your favor when you're a borrower, but against you when you're an investor. 
Investing
How Interest Rates Affect Mutual Funds
Find out how changing interest rates impact mutual funds, including bond and money market funds, and how higher rates can discourage investors.

How to calculate compound loan interest in Excel?
Find out about compound interest and how to use the compounding interest formula in Microsoft Excel to calculate the compound ... Read Answer >> 
How do I calculate compound interest using Excel?
Learn how to calculate compound interest using three different techniques in Microsoft Excel. Read Answer >> 
Yield vs Interest Rate
Yield is the dividend or interest investors receive from a security, while interest rates are figures charged by a lender, ... Read Answer >>