To understand Annual Equivalent Rates, you need to understand when interest payments are made. If they are paid quarterly for instance, that interest amount is taken into account when calculating the interest payable on the next payment. The compounding effect works to maximise the amount on which you will receive interest on, working to your benefit.
For example…
Gary, who is trying to maximise his savings of a hundred thousand dollars to fund his startup. His options are in savings accelerators across three banks. Bank X pays three point one percent annually, bank Y pays three point nine eight percent quarterly and bank Z pays three point seven percent bi-annually. Calculating the annual equivalent rate shows that bank Z has the best offer on hand.
