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Global

Investments Overview

 

...

Understanding the Math of Returns

 

Each Country or institution has a different way to present the percentage of the returns to their investors, and it is good to understand it to avoid surprises.

Frist, the meaning of the acronyms.

  • AER: It stands for Annual Equivalent Rate. This figure shows what the interest rate would be if interest was paid and compounded on an annual basis.

  • P.A.: It stands for Per Annum. This figure shows the simple interest rate.

In European Countries is very common you see P.A. or AER. Specially AER when your investments has daily, monthly and quarterly payments.

In South American Countries is very common, if your investments has monthly payments, the interest rate is showed per month.

What are the differences mathematically?

Per Annum (Simple Interest)

Amount Invested = $1.000,00

Interest Rate P.A. = 10%

Returns after 1 year = $100

Total Amount after 1 year = $1.100,00

Per Month (Compound Interest)

Amount Invested = $1.000,00

Interest Rate P.M. = 0,8333%

 

Returns after 1 month= $8,33 ($1000 x 8,333%)

Total Amount after 1 month = $1.008,33

 

Returns after 1 year = $8,33 ($1000 x 8,333%)

Total Amount after 1 year = $1.008,33

Simple Interest Formula


Simple Interest = P × i × n

P=Principal
i=Interest rate
n=Term of the loan

Compound Interest Formula

 

A = Final amount
P = Initial principal balance
r = Interest rate
n = Number of times



 

AER =

[

(

1 +

r

_

n

)

n

- 1

]

x 100

A = P 

(

1 +

r

n

_

)

n

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Article written by Luiz C. Mariani | Published August 2023

Reference sources:

SAP (www.sap.com); Oracle (www.oracle.com); Wikipedia (www.wikipedia.org); Forbes (www.forbes.com)

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