What is an annual equivalent rate?

The annual equivalent rate is used to compare the interest rates between loans or investments with different compounding periods, such as weekly, monthly, half-yearly, or yearly. Therefore, it can be used by both an individual looking for the best savings account or an investor comparing bond yields.

How to use the equivalent interest rate calculator?

The equivalent rate calculator converts an interest rate from one compound frequency to another while keeping the effective interest rate constant. You can use it on a savings account or investment product where interest compounds more than once a year.

What is the annual equivalent rate of a compounding frequency?

Annual Equivalent Rates of Different Compounding Frequencies For example, let’s say Bond A offers a semi-annual coupon rate of 3%. The nominal rate of the bond is 6% since it is two 3% coupons. However, the AER of the bond will be higher given that interest is paid out two times a year.

Why is the nominal rate always higher than the AER?

The nominal rate, or the stated rate, can be materially different than the AER due to the effects of compounding. It means that the AER is always higher than the nominal rate when considering compounding. The table below visualizes the potential differences in the annual equivalent rate and the nominal rate with different compounding frequencies: