Finance and the Economy · Seminar 7 · Finance for business

Amjad’s deposit: compounding forwards, yield backwards

A deposit grows by the same percentage every year, so the growth is compound, not straight-line. Going the other way, knowing only what went in and what came out, the average annual return is the nth root of the growth factor. Question 2.

Pick a part of the question, or set your own deposit, rate and term. Bars are the compound balance; the dashed line is what simple interest would give.
£100£2,000
0%10%
120

Balance at the end

Total interest

Simple interest would give

Yield recovered from PV and FV

The formulas. FV = PV × (1 + r)ⁿ. Rearranged, r = (FV ÷ PV)^(1/n) − 1. The second one is the internal rate of return, which banks quote as AER on deposits and APR on loans.

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