Financial Markets Book Financial Markets For The Rest Of Us
An Easy Guide To Money, Bonds, Futures, Stocks, Options, And Mutual Funds
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by Robert Hashemian

Page 21

do, please let me know - I'd like to get in on it too.) If you place $1,000 in this account today, in one year you will collect $200 in interest.

$1,000 x 20% = $200

Therefore the yield on your investment will be $200 after one year. That is of course if the interest on this account was compounded yearly, meaning it was calculated once a year. This isn't normally the case, however, otherwise you would need to lock in your money for the entire year to realize any gains.

Suppose now that the interest on this account is compounded semiannually, meaning that interest is paid twice a year. Then you would realize a 10% gain after the first six months and another 10% after the second six months for a total of 20%. (Bear in mind that most savings accounts compound interests daily, but then again I do not know of any paying 20%.) At the end of the first six months you would have $1,100 in your account

($1,000 x 10% = $100 interest)

and for the second six months the 10% interest will be applied to $1,100.

$1,100 x 10% = $110 interest, during the second six months.

Now your total interest for one year becomes $100 (first six months) + $110 (second six months) = $210. The yield on your investment now is $210.Your account has now grown to $1,210 from the $1,000 original investment.


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