Annual equivalent rate

A rate restated on a like-for-like annual basis, so accounts that add interest at different frequencies can be compared against each other.

Example

A nominal 4.00% is 4.0000% added annually, 4.0742% added monthly and 4.0808% added daily - on 10,000 that is 10,400.00, 10,407.42 and 10,408.08.

Important

Two accounts advertising the same headline rate can pay different amounts. Compare the annual equivalent figures with each other, and never a headline rate against an equivalent one.

Related terms

• Compounding — Earning returns on your past returns, not only on your original money.
• Bank deposit — Money handed to a bank in exchange for a claim on it. The bank owns the money and lends most of it out; what you hold is a debt that institution owes you, repayable on the terms of the account.
• Nominal return — An investment's return in raw currency terms, before adjusting for inflation.

Lessons that explain it

• Interest, and a rate somebody else can change — The whole return is a rate applied to a balance. What makes it unlike every other asset class is that the rate is set by the institution, can be changed at will, and you have agreed to that in advance. (10 min)
• The spread between the policy rate and what you are offered — There is no market price here. The price is the gap between what the central bank sets and what the institution passes on - and that gap widens and narrows in a pattern that is not symmetric. (11 min)
• Appraising one account: rate, access, cover and the expiry date — Six checks on one specific account. The headline rate is the one everybody runs and the only one that can be withdrawn without warning - so it belongs fourth, not first. (12 min)

All 578 terms in the Investing glossary