970 • £4.99 (4.56% of £109.33) at the end of year 3,
971 • £5.21 (4.56% of £114.32) at the end of year 4, and
972 • £5.45 (4.56% of £119.53) at the end of year 5,
974giving a final total of £124.98.
976Not exactly £125 but as close as we can get to 2 decimal places (try the calculation with
9774.57% instead – you will get £125.05).
979 • The AER for more complicated patterns of changing deposits and/or interest rates
980 can really be solved only by trial and error – a process best left to computers!
982The AER is a notional rate – it is not necessarily equal to the cash return because, in
983calculating it, we make assumptions:
985 • The only changes to the amount deposited that are taken into account are those that
986 are required by the terms of the account. So, for example, on an account from which
987 you can make withdrawals, the assumption is that you make just an initial deposit
988 and leave it there. On the other hand, on a monthly savings account, it is assumed
989 that you will make the deposits each month. If certain deposits are required to qualify
990 for a conditional bonus, then the AER including conditional bonuses will be calculated
991 assuming that you have made the necessary deposits.
993 • The only changes to rates that are taken into account are those that are stated at the
994 outset. No allowance is made for change that may occur because market rates
995 generally move up or down. So, for example, if an account has a rate which will
996 increase the longer a deposit is held, the higher rate will be used after the requisite
997 time. Where an initial higher rate is guaranteed for a number of months, the rate after
998 that will be assumed to reduce to the “normal” rate applicable at the time of the
999 advertisement. If a monthly savings account has a tiered interest rate, then the
1000 appropriate rate will be used as the balance builds up.
1002 • If an account has a fixed or minimum term, the assumption will be made that you
1003 leave your deposit there for that period. If the term is indefinite, the calculation is
1004 done on the first year, or until the first interest payment if that is after one year. If a
1005 conditional bonus requires that you leave the deposit in the account for a certain
1006 time, then the AER including conditional bonuses will be calculated over that period.
1008 • All interest paid is treated as if it is invested and earns a rate of interest equal to that
1009 being earned on your deposit. This may, in fact, happen if the interest is added to
1010 principal. However, even on an account making monthly interest payments, this
1011 assumption is made to illustrate the value to you of receiving these payments during
1012 the year. If a deposit has a very short term (for example, a six-month bond), for AER
1013 purposes, it is assumed that you can invest the principal and interest at the end of
1014 the period at the same rate for the rest of the year.