Let us face it, most investors are confused with the two percentages associated with a fixed deposit: annual interest and annual yield. Most people make the common mistake of assuming that the yield (often higher than the interest rate) is the interest rate!
So let us try to understand what each term represents.
If I invest Rs. 100 in a FD that offer 10% per year, my investment will grow to
- Rs. 110 at the end of 1 year
- Rs. 121 at the end of 2 years
- Rs. 133.1 at the end of 3 years.
If I want to represent this growth by a constant percentage, then I use the annual interest rate.