Periodic yield: Difference between revisions
imported>Doug Williamson (Expand to incorporate conversion formulae.) |
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'''Conversion formulae''' | '''Conversion formulae (r to EAR and EAR to r)''' | ||
EAR = (1 + r)<sup>n</sup> - 1 | EAR = (1 + r)<sup>n</sup> - 1 | ||
r = (1 + EAR)<sup>(1/n)</sup> - 1 | |||
r= (1 + EAR)<sup>(1/n)</sup> - 1 | |||
Revision as of 09:53, 1 November 2015
Periodic yield is a rate of return - or cost of borrowing - expressed as the proportion by which the amount at the end of the period exceeds the amount at the start.
Example 1
GBP 1 million is borrowed or invested.
GBP 1.03 million is repayable at the end of the period.
The periodic yield (r) is:
r = (End amount / start amount) - 1
Which can also be expressed as:
r = (End / Start) - 1
or
r = <math>\frac{End}{Start}</math> - 1
= <math>\frac{1.03}{1}</math> - 1
= 0.03
= 3%
Example 2
GBP 0.97 million is borrowed or invested.
GBP 1.00 million is repayable at the end of the period.
The periodic yield (r) is:
r = <math>\frac{End}{Start}</math> - 1
= <math>\frac{1.00}{0.97}</math> - 1
= 0.030928
= 3.0928%
Check:
Amount at end = 0.97 x 1.030928 = 1.00, as expected.
Example 3
GBP 0.97 million is invested.
The periodic yield is 3.0928%.
Calculate the amount repayable at the end of the period.
Solution
The periodic yield (r) is defined as:
r = <math>\frac{End}{Start}</math> - 1
Rearranging this relationship:
1 + r = <math>\frac{End}{Start}</math>
End = Start x (1 + r)
Substituting the given information into this relationship:
End = GBP 0.97m x (1 + 0.030928)
= GBP 1.00m
Example 4
An investment will pay out a single amount of GBP 1.00m at its final maturity after one period.
The periodic yield is 3.0928%.
Calculate the amount invested at the start of the period.
Solution
As before, the periodic yield (r) is defined as:
r = <math>\frac{End}{Start}</math> - 1
Rearranging this relationship:
1 + r = <math>\frac{End}{Start}</math>
Start = <math>\frac{End}{(1 + r)}</math>
Substitute the given data into this relationship:
Start = <math>\frac{1.00}{(1 + 0.030928)}</math>
= GBP 0.97m
Check:
Amount at start = 0.97 x 1.030928 = 1.00, as expected.
Effective annual rate
The periodic yield (r) is related to the effective annual rate (EAR), and each can be calculated from the other.
Conversion formulae (r to EAR and EAR to r)
EAR = (1 + r)n - 1
r = (1 + EAR)(1/n) - 1
Where:
EAR = effective annual rate or yield
r = periodic interest rate or yield, as before
n = number of times the period fits into a calendar year
