Question about Interest & AER

Krav

Hi All,

- Interest
If I put £10K into a savings account which pays 4.08% gross interest every quarter, does that mean that at the end of each quarter, I will get 4.08 * 10000 paid in as interest (ignoring tax)?

i.e. 4.08/100 * 10000 = £408 gross per quarter?

- AER
If this savings account pays 4.14% AER, does that equate to an annual interest of 408 x 4 plus each months "interest on interest"? How is it calculated?

I don't understand AER fully, as it implies that I will only get 4.14% of 10k each year "compounded" (i.e. 4.14/100 * 10000 = £414 every year), as opposed to £408 each quarter. Or worse yet, is it £414/4 = my quarterly interest? Any thoughts?

Cheers.

grumbler

Krav wrote:

If I put £10K into a savings account which pays 4.08% gross interest every quarter, does that mean that at the end of each quarter, I will get 4.08 * paid in as interest (ignoring tax)? i.e. 4.08/100 * 10000 = £408 gross per quarter?

No, it is gross p.a. First quarter interest is 10000*4.08%/4=102. Next quarter 10102*4.08%/4 ... etc.

- AER
If this savings account pays 4.14% AER, does that equate to an annual interest

Yes: Annual Equivalent Rate.

I don't understand AER fully, as it implies that I will only get 4.14% of 10k each year "compounded" (i.e. 4.14/100 * 10000 = £414 every year), as opposed to £408 each quarter. Or worse yet, is it £414/4 = my quarterly interest? Any thoughts?

:mad:
Quarterly interest is (Gross p.a.)/4. AER=[1+(Gross p.a.)/4]^4-1.

(1+4.08%/4)^4-1=4.14%

EDIT: And backwards: (quarterly interest) =(Gross p.a.)/4 = (1+AER)^(1/4)

Krav

Thank you very much for your reply - sorry for the stupid question. It all makes sense now.