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Daily Interest Rate Formula:
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The daily interest rate calculation converts an Annual Equivalent Rate (AER) into its equivalent daily compounding rate. This is essential for understanding how interest accrues on a daily basis for savings accounts, investments, and loans that compound interest daily.
The calculator uses the daily compounding formula:
Where:
Explanation: This formula calculates the daily interest rate that, when compounded daily, would yield the specified annual rate over one year.
Details: Understanding daily interest rates is crucial for comparing financial products, calculating daily interest accrual, and making informed decisions about savings and investments. It helps investors and savers understand exactly how their money grows each day.
Tips: Enter the Annual Equivalent Rate (AER) as a percentage. For example, enter "5" for a 5% annual rate. The calculator will provide both the daily rate as a percentage and in decimal form for easy use in further calculations.
Q1: What is the difference between AER and APR?
A: AER (Annual Equivalent Rate) shows the interest you'll earn on savings, while APR (Annual Percentage Rate) shows the cost of borrowing including fees and interest.
Q2: Why use 365 days instead of 360?
A: Most modern financial calculations use 365 days for daily compounding to reflect the actual number of days in a year, providing more accurate results.
Q3: How does daily compounding affect overall returns?
A: Daily compounding results in slightly higher effective returns compared to annual compounding due to the compounding effect occurring more frequently.
Q4: Can I use this for monthly compounding?
A: No, this formula is specifically for daily compounding. For monthly compounding, you would use (1 + AER)^(1/12) - 1.
Q5: Is the daily rate the same every day?
A: Yes, when using this calculation method, the daily rate remains constant throughout the year, assuming the AER doesn't change.