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    1 Fixed Deposit

    Uploaded by

    SaravananSrvn
    The document discusses the difference between nominal interest rate and real interest rate in the context of fixed deposits (FDs). It explains that while bank advertisements may advertise an annual yield rate, this does not reflect the actual annual interest rate earned. As an example, a bank advertising a 9.25% annual yield rate on a 3-year FD is actually offering an 8.25% annual interest rate. The document also discusses cases where yield may be a useful metric, such as when comparing investment options with different interest rates and compounding frequencies but the same duration. Overall, it stresses that investors should understand the distinction between interest rate and yield and do their own calculations before making investment decisions based on advertised yields alone.

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    1 Fixed Deposit

    Uploaded by

    SaravananSrvn
    38 views1 page
    The document discusses the difference between nominal interest rate and real interest rate in the context of fixed deposits (FDs). It explains that while bank advertisements may advertise an annual yield rate, this does not reflect the actual annual interest rate earned. As an example, a bank advertising a 9.25% annual yield rate on a 3-year FD is actually offering an 8.25% annual interest rate. The document also discusses cases where yield may be a useful metric, such as when comparing investment options with different interest rates and compounding frequencies but the same duration. Overall, it stresses that investors should understand the distinction between interest rate and yield and do their own calculations before making investment decisions based on advertised yields alone.

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    fixed deposit nominal interest rate and real interest rate

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    The document discusses the difference between nominal interest rate and real interest rate in the context of fixed deposits (FDs). It explains that while bank advertisements may advertise an annual yield rate, this does not reflect the actual annual interest rate earned. As an example, a bank advertising a 9.25% annual yield rate on a 3-year FD is actually offering an 8.25% annual interest rate. The document also discusses cases where yield may be a useful metric, such as when comparing investment options with different interest rates and compounding frequencies but the same duration. Overall, it stresses that investors should understand the distinction between interest rate and yield and do their own calculations before making investment decisions based on advertised yields alone.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    38 views1 page

    1 Fixed Deposit

    Uploaded by

    SaravananSrvn
    The document discusses the difference between nominal interest rate and real interest rate in the context of fixed deposits (FDs). It explains that while bank advertisements may advertise an annual yield rate, this does not reflect the actual annual interest rate earned. As an example, a bank advertising a 9.25% annual yield rate on a 3-year FD is actually offering an 8.25% annual interest rate. The document also discusses cases where yield may be a useful metric, such as when comparing investment options with different interest rates and compounding frequencies but the same duration. Overall, it stresses that investors should understand the distinction between interest rate and yield and do their own calculations before making investment decisions based on advertised yields alone.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
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    Fixed Deposit: Nominal interest rate or Real interest rate

    A recent advertisement by a popular bank offering 9.25% annualized yield on 36 month FD. The ad
    attracted my interest and I was sure it also attracted many people looking for high interest rate FD’s.
    but the bank has mentioned the annual yield not annual interest rate. The basic difference between
    interest rate and yield are with examples

    If I deposit Rs 1,00,000 with 8.25% interest for 36 months we get 27,760 as interest

    If we calculate yield = 27760/(1,00,000 x 3) x100= 9.25%

    This is how the ads shows 9.25% instead of 8.25% interest rate. The annual yield is simple interest.

    Whether the yield is useful?

    There are cases when yield can be used for comparison. One case would be when you want to
    compare FD with same life years but having different interest rate and different compounding
    frequency.

    We have two investment option with better returns

    a) Rs 1,00,000 with interest rate of 8.50% compounding annually for 2 years


    b) Rs 1,00,000 with interest rate of 8.25% compounding quarterly for 2 years

    In the first option (a) the interest would be Rs 17,723 and in second option (b) the interest rate
    would be Rs 17,742 (difference between a & b is Rs 19). The yield would be first 8.86% and second
    8.87%.

    As investor we have to understand the interest rate and annual yield on fixed deposit. The ads do
    not give the accurate details about the returns , its the investor responsibility to dot he calculation
    before investing

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