In deposit terminology, the term AER refers to the Annual Effective Rate that is sometimes also called the Annual Equivalent Rate. The AER consists of an interest rate that reflects what interest rates would be if the interest income was paid and compounded every year.
For example, the AER gives an investor an accurate comparison of the performance of different investments and debt instruments that pay out interest over different time frames. The Annual Effective Rate is determined by a simple mathematical formula:AER = (1+ r/n)nwhere the letter r represents the annualized interest rate, while the letter n represents the times per year that interest is paid out and compounded. The Annual Effective Rate allows both investors and lenders an opportunity to more easily compare what returns on their savings can be expected over time.