Yield vs Rate
- To make their product look better than their competitors, some banks & Companies that solicit Fixed Deposits will put emphasis on Yield. Don’t fall for a higher Yield instead of higher Rate of Interest as higher yield doesn’t necessarily mean that you get a better deal.
- Never compare Yields on Fixed Deposits without taking into account the tenure!!
- Yield is nothing but Simple Interest calculated on a Fixed Deposit. Therefore, if a Fixed Deposit is held for longer tenure, it will have a higher yield even though the Rate of Interest remains same!!
Look at the following calculation of Yield:
- If Rate of Interest on a Fixed Deposit: 10% p.a., compounded yearly
- Principal Amount: Rs. 1,00,000
- Maturity Amounts on various tenures are as follows:
- 12 months deposit: Rs. 1,10,000
- 24 months deposit: Rs. 1,21,000
- 36 months deposit: Rs. 1,33,100
- 60 months deposit: Rs. 1,61,051
- Yields are computed as under:
- 12-month deposit: Total Interest earned: 10%; Period - 1 year; Therefore Yield is 10% p.a.
- 24-month deposit: Total Interest earned: 21%; Period - 2 Years; Therefore Yield is 10.5% p.a.
- 36 month deposit: Total Interest earned: 33.1%; Period - 3 Years; Therefore Yield is 11.03% p.a.
- 60 month deposit: Total Interest earned: 61%; Period - 5 Years; Therefore Yield is 12.2% p.a.
This is how a 10% p.a. Fixed Deposit can be advertised as 'Yield of Upto 12.2% p.a.'