Managing my money
Managing my money

This free course is available to start right now. Review the full course description and key learning outcomes and create an account and enrol if you want a free statement of participation.

Free course

Managing my money

5.2.2 Spot the highest Annual Equivalent Rate (AER)

This quiz tests your ability to spot the highest Annual Equivalent Rate (AER).

Activity 1

Suppose that a savings account advertises an annual interest rate of 5%, with interest payable either daily, weekly, monthly or annually.

Which account will have the highest AER?

a. 

Daily


b. 

Weekly


c. 

Monthly


d. 

Yearly


The correct answer is a.

a. 

Well done. Daily is the correct answer. The more frequent the payment, the more compounding of interest there will be. Therefore, annual 5% interest paid weekly will have a higher AER than 5% paid monthly, which in turn will have a higher AER than 5% paid quarterly. The table here shows AERs for each period.


Answer

Table 3 AER for a range of interest payment periods

Advertised rate 5%
Period rate AER
Daily 0.0137% 5.127%
Weekly 0.0962% 5.125%
Monthly 0.4167% 5.116%
Quaterly 1.2500% 5.095%
Annually 5.0000% 5.0000%
MMM_1

Take your learning further

Making the decision to study can be a big step, which is why you'll want a trusted University. The Open University has over 40 years’ experience delivering flexible learning and 170,000 students are studying with us right now. Take a look at all Open University courses.

If you are new to university level study, find out more about the types of qualifications we offer, including our entry level Access courses and Certificates.

Not ready for University study then browse over 900 free courses on OpenLearn and sign up to our newsletter to hear about new free courses as they are released.

Every year, thousands of students decide to study with The Open University. With over 120 qualifications, we’ve got the right course for you.

Request an Open University prospectus