AER Practice Note — Page 14

Then find the AER including conditional bonuses by solving:
                           
                                    21- n
                  20
                      
T = £11,785.78 =  Dn 1+   
                 n=1   100 
                                                           
                                            20                           17
                                                       
                 = £3000( = D1 ) 1+    + £1800(= D4 ) 1+   
                                  100                  100 
                                             
                                                  5
                                        
                   + ... + £600(= D16 ) 1+   
                                         100 
which, by trying various values, yields  = 1.8127… ≡ 7.2511...% per annum paid quarterly.
Use formula (d) to convert this to an annually compounded rate giving an AER including
conditional bonuses of 7.45% to two decimal places.
                                 7.2511...      
                                                   4
                          
                        = 1 +                  - 1  100 = 7.4506...
                            4( quarters)  100  
                                                     
Detail of the calculation of T:
          n                Dn (£)                in (%)          1 + in / 100        T = sum of:
          1                 3000                            0                            4,211.27
          2                                                 0
          3                                               5.25          1.0525
          4                 1800                            0                            2,400.72
          5                                                 0
          6                                                 0
          7                                                 7                 1.07
          8                 1800                            0                            2,243.67
          9                                                 0
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