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AER puzzle

Investment discussion for beginners. Why you should invest your money, get help getting started
lennich
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AER puzzle

#121417

Postby lennich » March 1st, 2018, 5:15 pm

RCI bank have a savings account with AER of 1.3% if interest paid annually. They say you can have interest paid monthly, in which case the AER would be 1.29%. They also say that the result is the same in both cases. It's that bit I don't understand. Surely the AER would have to be the same for that to be true?

Anyone explain it simply?

robbelg
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Re: AER puzzle

#121430

Postby robbelg » March 1st, 2018, 5:36 pm

I'm not an expert but I believe that the AER is calculated on the basis of the interest being paid out whilst the "End Result" includes the interest being retained in the account and thus itself earning interest.


Rob

Alaric
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Re: AER puzzle

#121438

Postby Alaric » March 1st, 2018, 6:08 pm

lennich wrote:Surely the AER would have to be the same for that to be true?


I would suspect there's a mandated formula which contains an approximation, probably for the monthly calculation.

Getting the same result in both cases depends on not withdrawing the interest and compounding the monthly interest also at 1.3% annualised.

GeoffF100
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Re: AER puzzle

#121442

Postby GeoffF100 » March 1st, 2018, 6:46 pm

The summary box for the RCI Bank Freedom savings account says:

1.30% AER gross variable (annual interest)
1.29% AER gross (monthly interest)
− This rate works out the same whether you have your interest paid monthly
or annually and is paid without tax deducted. This rate is effective from
05 October 2017.
− AER stands for Annual Equivalent Rate and illustrates what the interest rate
would be if interest was paid and compounded on an annual basis. Interest
will be paid monthly on the day of the month you first paid into your account
or annually on the anniversary of making your first payment.

If you compound a monthly interest rate of 1.29% / 12 for twelve months you get 1.2976545%. I expect that the annual interest rate is 1.3% and the monthly interest rate is 1.29%, giving an AER of 1.3% in both cases. I expect that the summary box is wrong. RCI Bank states elsewhere that the AER is 1.3%, without any further qualification.


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