The AER (Annual Equivalent Rate) is a standardized measure used to compare the return on investment across different time periods. It accounts for compounding interest and allows for easier comparison between investment options.
To calculate the AER for the National Solidarity Bond with a gross return of 15% over a 5-year period, we can use the following formula:
AER = (1 + \frac{r}{n})^n - 1
Where:
r = nominal interest rate (15% in this case)
n = number of compounding periods per year (typically 1 for annual compounding)
Substituting the values into the formula:
AER = (1 + \frac{0.15}{1})^1 - 1
Simplifying the calculation:
AER = (1 + 0.15) - 1
AER = 1.15 - 1
AER = 0.15