Thread: One for the maths gurus, or should it be gurii

Originally Posted by jx2mad

What is the actual rate of return on an investment for a term of 9 months with a return of 2.6% for 12 months?

I don't understand the question , let alone the math. I think this indicates my last few remaining brain cells have left home. Still, it must have been lonely for them.

Originally Posted by Bytemrk

All depends how often interest is paid..... if it's once, at the end of the investment, Ian's calculation is correct.

Originally Posted by SBD4

Here ya go:
http://www.thecalculatorsite.com/art...st-formula.php

Attachment 135139

Bingo.
If interest is calculated every 12 months, then an investment held for 9 months will have no return.
The devil is in the detail. We didn't get much info.

SBD4's formula is correct if it's a compounding investement, not a bond or share that just gives a dividend off it's face value. How frequently the interest is calculated would have a bearing on the rate of return. the more frequently interest is calculated, the better off you'll be- you want every little amount of interest to count as the principal, which then accrues interest for you on the next interest calculation.

Opposite applies for debts which accrue interest- pay as frequently as you can to minimise your interest.

ok details. This is what the Combank is offering on a 9 month term deposit, interest paid on maturity. Is it actually worth it?

....mate , it's always worth it, but I can't help thinking that if you are close to retiring you wouldn't use those funds to top up your superannuation which will give you a much higher return.

advice is cheap but if you want some , grab a copy of Noel Whiiitakers book, Making Money Made simple , read it and then decide on a plan of action.

some here will advise you not to read that book, but it is the best all round investment advice you can read without committment....and..it's cheap.

the next thing you should do is go to your bank with your newfound knowledge and speak to them about your future.

Originally Posted by jx2mad

ok details. This is what the Combank is offering on a 9 month term deposit, interest paid on maturity. Is it actually worth it?

OK, so that's what's called an annuity.
The principle stays the same and the interest you earn over the term of the deposit is paid as a lump sum. These are often used to hedge the ups and downs of an investment portfolio, as the return is low, but known in advance, and has low risk.

As for the 'is it worth it'? There are better investments, make no doubt about it, but they also carry higher risk.
You probably don't want to take that advice here. But I'll dig into the back of my mind from what I learned once and throw 2c at you for a helicopter view of the whole situation...

As with any investment there is risk and return.
Bonds, annuities and the humble old bank deposit earning interest can be considered low risk. As such you get low return.
Other high-risk investments can have many times the rate of return, but many times the risk. Look at biotech startup capital if you want to see some real risk!

Invstments should have the expected reutrn great than the cost of capital, otherwise we wouldn't ideally make these decisions. There are some financial formulas you can use, IRR is one, which uses the net present value of your money to evaulate different financial decisions. This allows you to reverse engineer the interest component of an investment and get a value of a financial decision in 'today's money'. The classic example is should I buy or lease a truck for work, and which offer is the most attractive once all future costs are worked back to today's money (ie net present value).
The cost of capital is your time value of money, and the risk that you won't get it back. If you money is not working for you (making interest) than it is not leveraging the time value of money. Likewise, for the risk side of things, a bank interest rate is usually used as a guideline for the 'risk free rate' of an investment. Add risk, get higher returns, take away risk, lower return. Usually money is relatively safe with a bank, as opposed to slinging a few bucks to a mate and saying 'can I have it back in 5 years, plus an extra $200 bucks plz'

Returns aside, term deposits can be less liquid than other investments, with your money 'tied up' for the term of the loan. Early exit may accure fees, and will not earn your interest- obviously speak to you financial planner and get your eyeballs on the terms and conditions of the financial product on offer. Not sure if the principle for the deposit or the need for liquidity, but keep it in mind. If you were hoping to cash in a fat stack of green ones from under the bed, then a term deposit won't allow you to peel a few off for landy parts or unexpected repairs.

Originally Posted by jx2mad

What is the actual rate of return on an investment for a term of 9 months with a return of 2.6% for 12 months?

Not much

My super fund made 9% last year so why would I put money in a bank for 2.6%over 12 months, particularly if the interest is only calculated once, at the end, which denies compounding interest. Maybe if the interest was calculated daily...

Being nearly 72 i cannot top up my super so I am trying to get the best return for what I have without taking financial risk.