Monday, February 18, 2008

Calculating the yield

Dear Mr Tan:

I am a faithful reader of your blog and enjoy the advices which you gave to the public. I wish to ask about the calculation of yield. I use the following formula:

$150 a month month for 21 years, total=$ 37800
Cash value = $ 61000
Yield for 21 years = (61000-37800) /37800 *100% = 61.4%
Yield per year =61.4/21= 2.9%
Is my calculation correct ?

REPLY:
The yield is calculated using a compound interest formula.
I use a financial calculator and input the following figures:
Annual savings: $1,800 (in advance)
Duration 21 years
Value on maturity: $61,000
The calculator gives me a yield of 4.5%.

If you take a regular saving of $1,800 a year and add interest at 4.5% on the increasing balance yearly, you will arrive at $61.000 at the end of 21 years.

Tip: Buy a financial calculator for $50.
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1 comment:

Priyadi said...

there are plenty of ready to use financial calculators on the internet, for example:

http://www.arachnoid.com/lutusp/finance.html
http://www.drcalculator.com/

or search google for 'financial calculator'

and we can also use spreadsheet (ms excel or openoffice calc) to do the calculation. most important financial functions within spreadsheet: PV(), FV(), PMT(), RATE() and NPER().

no need to shell out $50 for a calculator. our computers are perfectly capable of doing the calculation.

February 18, 2008 7:49 PM

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