How to Calculate a Time-Based Investment Return
Original post by Mark Kennan of Demand Media
Some investments require a specific investment amount in return for a future amount, such as a zero-coupon CD. You can calculate the annual interest rate on the time-based investment based on the initial and final amounts as well as the time passed. For example, if you purchase a note that will be worth a specific value in the future, you can figure the annual rate of return so that you can compare it to other investments. However, when comparing investments, be sure to consider the riskiness of each investment, not just the promised return.
Divide the maturity value by the initial investment to find the overall rate of increase. For example, if you purchase a security for $4,200 and it will be worth $7,000 at maturity in eight years, divide $7,000 by $4,200 to get 1.666666667.
Divide 1 by the number of years over which you earn the investment return. In this example, divide 1 by 8 to get 0.125, because the return accrues over eight years.
Raise the overall rate of increase to the power of the Step 2 result. In this example, raise 1.666666667 to the 0.125th power to get 1.065935911.
Subtract 1 from the result to find the annual rate of return of your investment. In this example, subtract 1 from 1.065935911 to find the annual rate of return equals 0.065935911, or about 6.59 percent per year.
- University of Arizona: Compound Interest and APY
- DePaul University: Compound Interest Formula
- Bankrate.com; Zero-Coupon CDs; What are They?; Sheyna Steiner; 2010
About the Author
Mark Kennan is a freelance writer specializing in finance-related articles. He has worked as a sports editor for "Ring-Tum Phi" and published articles on a number of online outlets. Kennan holds a Bachelor of Arts in history and politics from Washington and Lee University.