Saving Accounts, Interest Rates And AER

Question 1

What is the interest rate?

Answer 1

The interest rate as advertised by bank or building society. Compromised of a percentage rate and how many times a year the interest is calculated.

Question 2

What is the nominal rate?

Answer 2

An interest rate as a percentage used to give a rough comparison of the interest rate over a year. It is an approx calculation and does not account for the compounding effect.

Question 3

What is AER (annual equivalent rate)?

Answer 3

The interest rate used to give an accurate comparison of interest rates over a year and does take into account the compounding effect.

Question 4

How do you convert interest rate to nominal rate?

Answer 4

Interest rate x number of payments/PA = nominal rate

Question 5

How do you convert nominal rate to interest rate?

Answer 5

Nominal rate/number of payments PA = interest rate

Question 6

How do you convert interest rate to AER?

Answer 6

(Interest rate as a decimal + 1) ^payments a year -1 x 100

Question 7

How do you convert nominal rate to AER?

Answer 7

(Nominal rate as decimal/number of payments PA +1) ^number of payments PA -1 x 100