What is the annual equivalent rate?
The annual equivalent rate is the rate for which interest would be paid out of the investment during the year. The rate is a good opportunity to compare revenues or interest on investment, as well as to get more precisely predicting what this investment actually earns. The reason why the annual equivalent rate varies from the annual percentage of percentage of the percentage point of view is that the interest earned and paid in the previous points of the year continues to gain interest together with the original director. In some countries, such as the United Kingdom, the equivalent rate is published as a regular course of business for some investment products.
One of the most common situations in which an annual equivalent rate can be used is in bank savings products such as savings accounts and even deposit certificates. If the bank offers six percent interest on the investment product, paid half -annual and the investor will insert $ 100,000 (USD), a total of $ 103,000. At the end of the year the amount would increase to 106 090 USD. As a result, the annual equivalent rate is 6.09 percent.
If the interest was paid at the same time, at the end of the 12 -month period, rather than having a payment made in the middle to obtain the same amount of money, the annual percentage rate would have to be set at 6.09 percent. Therefore, the annual equivalent rate is always even with an annual percentage rate. If the interest is paid only once a year, both rates will be the same.
It is also possible that interest rates are paid more than twice a year. Depending on the investment product, investors can receive interest payments as often as once a month. Increase in interest payments would also lead to an increase in the annual equivalent rate. Therefore, not only the real century is a large factor in the equivalent rate can also have a big impact frequency.
To determine the annual equivalent rate, the investor must know both the annual percentage rate and the frequencyoutfit payments. Divide the frequency of payment at an interest rate and then add it. In addition, use the payment frequency to exponentially increase this amount. For example, if the payment frequency was twice a year, you would increase the amount to the second power. Once you have this number, you deduct one and get an annual equivalent rate.