Correlation between rate of return from fixed deposit and its CAGR
Formula to calculate the compound interest from fixed deposit is: Final value = Principal × [1+(r/n)]^(n×t) Principal refers the invested amount. ‘n’ is compounding frequency, generally the value is 4 (quarterly for banks). ‘t’ is total period in years. ‘r’ is the annual interest rate. Rate of return (in %) is calculated as: [(Final value – Initial value) / Initial value] × 100 Compound Annual Growth Rate (CAGR)is used to measure the rate of return in a given period from an investment. It is a measure of the average yearly growth rate. Formula to estimate CAGR is: CAGR (%) = {[(Final value/Principal)^(1/t)] - 1} × 100 t = Number of years (Period). Find the return and CAGR, if $100 is invested in fixed deposit at 7% interest rate for a period of 5 years. n = 4((quarterly basis) t = 5 years r = 7/100 = 0.07 Principal = 100 Maturity (Final) value is calculated as: = 100 × [1+(0.07/4)]^(4×5) = 141.47 So, the return after 5