Calculation to convert AER to Gross

Apreciar

Does anyone have the formula for converting Gross interest to AER and vice versa.
E.g. You know the Gross interest for an investment but want to calculate what the AER is if the interest is paid monthly.

YorkshireBoy

http://www.bba.org.uk/bba/jsp/polopoly.jsp?d=135&a=1575

Happy reading!

plonkee

I'm not sure but I think its:

12*((1+AER)^(1/12)-1)

so for 5% interest rate you get:

12*((1+0.05)^(1/12)-1) = 4.89%

does that seem right?

This assumes that you remove the monthly interest and don't allow it to compound. If you allow it to compound then you get AER = gross rate.

plonkee

In reverse it is

((1+gross_interest/12)^12)-1

so for 5% gross interest rate you get:

((1+0.05/12)^12)-1 = 5.12%

as the AER.