Fixed Deposits: Annual Yield vs. Annual Interest

Published: October 18, 2013 at 5:21 pm

Last Updated on June 21, 2016

The difference between annual yield and annual interest and how it can be used to misrepresent gains from fixed deposits is discussed.

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.

Annual Interest:

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.

  •  100 X (1+10%) = 110 (year 1)
  •  100 X (1+10%) X (1+10%) = 121 (year 2)
  •  100 X (1+10%) X (1+10%) X (1+10%) = 133.1 (year 3)

Therefore, the constant percentage is the annual interest rate of the FD, 10%

Annual Yield:

 Suppose I want to know the relative difference in my investment at the end of each year,

  • (110-100)/100 = 10% (year 1)
  • (121-100)/100 = 21% (year 2)
  • (133.1-100)/100 = 33.1% (year 3)

Although I understand the notion of the relative difference, I hope you agree with me that it does not help much.  Obviously, the relative difference of a one-year FD will be more than that of a two year FD. Beyond that, relative difference does not give us an insight in the manner of growth.

Annual yield is defined as the relative difference in investment value per year of investment.

For each year of investment the annual yield is,

  •  10%/(1) = 10% (year 1)
  • 21%/(2) =  10.5% (year 2)
  • 33.1%/(3) = 11.033% (year 3)

 Key difference between the annual yield (rate) and annual interest rate:

 Annual Interest rate is a constant for a fixed deposit. Annual yield rate increases with the increase in duration for the same interest rate.

For simplicity, I have considered annual compounding.  Other types of compounding are available for analysis in the excel tool.

Now, let us say I work in a bank, and my job is to sell FDs, in particular the FD, we have considered above.

Which statement would catch a client’s attention?

 A 3-year FD with 10% annual interest


 ‘a 3-year FD with an annualized yield of 11.033%’? 

Obviously many people assume that their money will grow at the rate of 11.033%.

This is wrong.  Their money will grow at 10% and will produce an annual(ised!) yield of 11.033%.

  • Given the yield rate, the interest rate can be calculated.
  • Given the interest rate, the yield rate for any duration can be calculated (why bother!)
  •  Use this excel tool to understand the relationship between yield rate and interest rate for a fixed deposit.
  •  This calculator was requested by Mr. Srinivas, a banker.

Download the Fixed Deposit Yield vs. Rate Analyzer

Download the Comprehensive fixed deposit calculator

with total and advance tax liability each financial year, now updated with pre-tax and post-tax annual yields for each month of investment.

Do share if you found this useful

Use our Robo-advisory Excel Template for a start-to-finish financial plan! Now with a new demo video!  More than 700 investors and advisors use this!
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 2600 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! More than 600 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
My new book for kids: “Chinchu gets a superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both boy and girl version covers of Chinchu gets a superpower.
Most investor problems can be traced to a lack of informed decision making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, if we had to groom one ability in our children that is key not only to money management and investing but for any aspect of life, what would it be? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parent’s plan for it and teach him several key ideas of decision making and money management is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Did you know? We have more than 1000+ videos on YouTube to explore! Join our YouTube Community!

Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
We publish mutual fund screeners and momentum, low volatility stock screeners .every month.
About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored three print books, You can be rich too with goal-based investing (CNBC TV18), Gamechanger, Chinchu Gets a Superpower! and seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations based on money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association, IIST Alumni Association. For speaking engagements, write to pattu [at] freefincal [dot] com
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions, seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)
Free android apps