How Do You Calculate Investment Rates Of?
Looking at a year-end statement that shows the “rate of return” on investments only tells part of the story on return. Whether it is an annual percentage yield (APY) or compound annual growth rate (CAGR), it is important for the investor to understand how these are calculated to make sure the numbers they are reading are what they expect. These are two of many rates of return and are most often used with personal finance investment calculations. Assume, for example, a $10,000 investment with a 6 percent return that compounds quarterly to be held for three years. Convert the interest rate into a decimal point by dividing it by 100. In our example, 6%/100 = .06. Determine the number of compounds in the year. Since our example is quarterly, this number is 4. Divide this into the number derived in Step 2. Example: .06/4 = .015. Add one (1) to the number determined in Step 3. Example: 1 + .015 = 1.015. Multiply the number of compounds per year with the number of years the investment will be
