Managing my money
Managing my money

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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 rate5%
Period rateAER
Daily0.0137%5.127%
Weekly0.0962%5.125%
Monthly0.4167%5.116%
Quaterly1.2500%5.095%
Annually5.0000%5.0000%
MMM_1

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