Unit 2 - Analysis of Data : AER

Question 1

What is AER?

Answer 1

Annual Equivalent Interest Rate
The general figure we use to compare savings rates, it allows us to compare interest rates which pay out over different time periods by finding one annual figure

Question 2

What’s the nominal rate?

Answer 2

Simple yearly interest, ignores compounding effect (interest gained in earlier months earns interest itself in later months)

Question 3

AER formula

Answer 3

r = [(1+ ⁱ⁄ₙ)ⁿ-1] x 100

i is the nominal interest rate (as a multiplier)
n is the number of compounding periods per year

i and r should be expressed as decimals

Question 4

Nominal rate formula

Answer 4

interest x number of ’sectors’ in a year

Sectors - e.g. interest paid every 3 months, so there are 4 lots of 3 months in a year