Last Updated on June 21, 2016
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
or
‘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.
My new book for kids: “Chinchu gets a superpower!” is now available!



How to profit from content writing: is our new ebook for those interested in getting side income via content writing. It is at available at a 50% discount for Rs. 500 only!
Use our Robo-advisory Excel Template for a start-to-finish financial plan!
Join our courses in exclusive Facebook Groups!
- 520+ members are now part of our new course: How to get people to pay for your skills! (watch 1st lecture for free). 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 how to achieve by showcasing your skills and building a community that trusts you and pays you!
- Goal-based portfolio management! Join 2125+ members and 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 of Rs. 3000 only. No recurring fees! Life-long access to videos (10+ hours content) in an exclusive Facebook Group! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
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

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 one million readers a year (2.5 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
- Twitter @freefincal
- Subscribe to our Youtube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing

Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want

Your Ultimate Guide to Travel

Free android apps
- All calculators from our book, “You can be Rich Too” are now available on Google Play!
- Install the Financial Freedom App! (Google Play Store)
- Install Freefincal Retirement Planner App! (Google Play Store)
- Find out if you have enough to say "goodbye" to your employer (Google Play Store)