Aspect | Gross Interest | Annual Equivalent Rate, AER |
---|---|---|
Definition | The interest rate before accounting for compounding. | The effective annual interest rate after compounding. |
Compounding | Does not consider the impact of compounding periods. | Considers compounding, showing the actual return per year. |
Formula |
I = P × r
|
AER = (1 +
r
n
)
nt − 1
|
Purpose | Shows the nominal interest rate before compounding. | A comparison tool for understanding the true growth of savings over time. |
Use Case | Useful for knowing the base rate offered by an account. | Ideal for comparing products with different compounding intervals. |