2.1.1 Spot the highest Annual Equivalent Rate (AER)
Banks and building societies have to display the Annual Equivalent Rate (AER) offered by each product, to enable investors to make comparisons between savings accounts. The AER takes into account not only how much interest is paid, but also exactly when interest payments to account holders are made.
Activity 2.1 Annual Equivalent Rates
a.
Daily
b.
Weekly
c.
Monthly
d.
Yearly
e.
Quarterly
The correct answer is a.
Discussion
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.
| Advertised rate | 5% | |
|---|---|---|
| Period rate | AER | |
| Daily | 0.0137% | 5.127% |
| Weekly | 0.0962% | 5.125% |
| Monthly | 0.1467% | 5.116% |
| Quarterly | 1.2500% | 5.095% |
| Annually | 5.0000% | 5.000% |