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 included in the principal payments balance, and that 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 a savings accounts is listed in the form of an annual equivalent rate (AER).
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 a borrower 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 account 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% = (1 + (0.0365 / 4))^{4}  1, which is 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 quoted 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. The calculation is (1 + (0.037 / 2))^{2}  1 = 3.73%.

Interest Rate
Interest rate is the amount charged, expressed as a percentage ... 
Periodic Interest Rate
The periodic interest rate is the interest rate charged on a ... 
Compound Interest
Compound Interest is interest calculated on the initial principal ... 
Stated Annual Interest Rate
A stated annual interest rate is the return on an investment ... 
Anticipated Interest
Anticipated interest is the amount of interest that a savings ... 
Compounding
Compounding is the process in which an asset's earnings, from ...

Personal Finance
APR and APY: Why Your Bank Hopes You Can't Tell The Difference
Do you know the difference between Annual Percentage Rate and Annual Percentage Yield? Check out how they can affect your own account balance. 
Investing
The Effective Annual Interest Rate
The effective annual interest rate is a way of restating the annual interest rate so that it takes into account the effects of compounding. 
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
Simple Interest Loans: Do They Exist?
Yes, they do. Here is what they are – and how to use them to your advantage. 
Investing
Continuous compound interest
Different frequency in compound interest results in different returns. Check out how continuous compounding accelerates your return. 
Personal Finance
Bank Profitability in the Era of Low Interest Rates
The "lowforlong" policy on interest rates presents a major challenge to bank profitability. 
Personal Finance
How Banks Are Dealing With Low Interest Rates
A surge in mortgages may help banks offset thin profit margins in the prolonged lowinterestrate environment. 
Personal Finance
How Banks Set Interest Rates on Your Loans
Are you planning on getting a loan from bank? Here is the information you need know on how banks set the interest rates to get the best possible deal.

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 >>