Business Terms: Annual Equivalent Rate (AER)

Annual equivalent rate is the notional rate that is quoted on interest paid on savings and investments. It shows what your investment returns ought to be if the interest was compounded and paid annually instead of monthly.

Let’s say your account gives you interests more than once in a year. AER will be calculated by adding each interest payment to the original deposit and then by calculating the next interest payment, you could have the interest compounded.

On accounts which interests are paid quarterly, the AER will be a bit higher than the quoted gross rate because it allows for interest paid on the interest.

AER normally excludes any bonus interest that may be payable.