Confused between interest rate and effective yield..?
We often see the
advertisement in daily newspaper, magazine about the fix deposit offered by
financial institution like bank, NBFC or corporate. They all offer the attractive
return on fix deposit and often used a famous term “annualized effective yield”.
There are difference between interest rate of fix deposit and annualized effective
yield. The investors often don’t able to differentiate these two terms.
Effective yield always look attractive than rate of interest on FD. We will
understand it through an example.
Let us say, one financial
institution offer an interest rate of 10% quarterly compounded for 1 to 10
year. So if one invest Rs 1,00,000 in this fix deposit for 4 year. In the first
year at 10% quarterly compounded interest, he will get total interest Rs 10,381.
After 4 year he will get total maturity amount of Rs 1,48,450. It means he has
earned total interest Rs 48,450. To know the annualized effective yield we will
divide it by no. of year deposit.
48450/4 = 12112.5
Annualized Effective Yield = (12112.5/100000)*100 = 12.11%
Now you can easily understand the difference between
these two types of rate. It means interest earned is same but companies can
show it in different style. To attract the clients and to edge over the competitor,
often some financial institution emphasis on a higher yield figure than normal
rate.
So next time, when you go
for fix deposit , please ask your representative for both rates and according
to that comparision with other available fix deposits in the market.
For more detail about any other query related investment,
you can contact me through my email.
Regards,
Arvind Trivedi
Certified Financial Planner
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