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Calculation of the Annual Equivalent Rate (AER)
31/01/2007
a) The most general case of the calculation is the rate of interest which, if applied each year to the deposits made by the customer, would result in the same end-value as the contractual interest rates and interest bonuses (if any), ie the solution to the following equation:
If deposits are made at more frequent intervals than whole years, the calculation can be made using monthly interest and the result expressed as an annual rate using the formula given at (d) below.
The equation, in its general form, is soluble only by iterative computation. For specific cases, general solutions are available and these can be used.
b)only one deposit is made at the start of the period, then the AER is
c) If the interest rate is quoted as the total payable over the period (longer than one year) on the initial deposit, then the AER is
d) Where interest is payable more frequently than annually, then the AER is
Related Links
Code of conduct for the advertising of interest bearing accounts
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Calculation of the Annual Equivalent Rate (AER) (PDF)
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