Investment Math: How to Calculate the Returns or Yield on a 5-Year Tax-Saving Fixed Deposit? Plus a Chance to Win a Personal Finance Book

by Vinaya HS on March 9, 2012

in Finance

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I happened to see the below ad for a 5-Year Tax-Saving Fixed Deposit from Canara Bank. Whenever I see such calculations for a financial product, my first instinct is to try and figure these out by myself. Upon a first and casual glance, the ad seems to boldly project that everyone who invests would get the high yield projected (and there seems to be an error in the calculated yield as we’ll see below). But that’s not so. If you happen to be in the 10% or 20% income-tax bracket your effective yields are much lower.

Canara_Bank_5-year_FD_0

First, some basics. The ad does not specify the compounding interval but plugging-in a quarterly compounding interval tallies up the figures (see: maturity amount of original investment).

Canara_Bank_5-year_FD_1

Next, if you happen to be in the 30% income-tax bracket, the effective annual yield works out to a cool 17.98% (not 17.77% as depicted in the ad; I verified this through alternative formulae too).

Canara_Bank_5-year_FD_2

But if you happen to be in the 20% income-tax bracket, the effective annual yield drops to 14.75% (and conveniently not shown in the ad).

Canara_Bank_5-year_FD_3

And finally, if you happen to be in the 10% income-tax bracket, the effective annual yield drops to 11.98% (again conveniently not shown in the ad).

Canara_Bank_5-year_FD_4

A misguiding ad in my opinion but then most are. The elephant in the ad could have easily given way to two other columns of information! What do you think?

Moving on to the book giveaway,

popQuiz

Here’s a chance to win a great personal finance book that I’m currently reading and reviewing. It’s India-specific, very recently published, and very timely. I think you already know which book I’m talking about. Here’s how you can win this book: In the income-tax-slab specific tables above, what’s the formula for calculating the APR? That’s it. The first two correct entries win a copy each. I’ll announce the winner next Friday along with a detailed review of the book. And as always, I will need your email address.

Note:

Once you have the APR, the APY is easy to calculate. Use this formula or if you’re lazy simply install this application for your Android-phone. I’ll also publish the full spreadsheet once the winners are declared.

Update: Announcing the winners of this book giveaway — congratulations Raghu and Rakesh. You win a copy of the book “Jago Investor — Change Your Relationship With Money” each. I’ve emailed you separately for your mailing address. Thanks for participating.

And here’s my detailed review of “Jago Investor — Change Your Relationship With Money”.




Thanks for reading this article. I'd love to hear your opinion. Please use the comments section below to share your thoughts. I frequently write new articles that also cover several other aspects of personal finance including credit cards, financial goals, health insurance, income tax, life insurance, mutual funds, retirement planning, and much more. You can Subscribe through Email and receive new articles directly in your Inbox or you can Subscribe through the RSS Feed and receive new articles in your feed reader.

{ 8 comments… read them below or add one }

Raghu March 9, 2012 at 5:35 PM

hi vinay,
I found your blog very interesting while searching in Google. So Keep writing
The formula for APR is APR – “=((1+R)^(1/12)-1)*12″ – where R is monthly payments.

Vinaya HS March 12, 2012 at 3:14 PM

@Raghu: Thanks. :-) Do you want to tweak your formula a bit?

Raghu March 13, 2012 at 10:25 AM

Yes of course vinay…..

Rakesh March 21, 2012 at 10:22 PM

@Vinaya,

Wow 17.98% is it for real?
As for the formula -

p =p0*r*(1+r)raised to n
________________
(1+r)raised to n-1

where:

P0 is the initial principal
r is the percentage rate used each payment
n is the number of payments

kumar prasoon March 23, 2012 at 9:43 PM

Respected Sir,

Kindly explain & send me the Annual Percentage Rate (APR) calculation done by you in case of the Canara Bank FD. If you have the detail excel sheet , kindly send me. I will be grateful to you. My ID is kumarprasoon99@gmail.com.

Thanks & Regards

Kumar Prasoon

Vinaya H S March 26, 2012 at 4:07 PM

Announcing the winners of the book giveaway:

Congratulations Raghu and Rakesh. You win a copy of the book “Jago Investor — Change Your Relationship With Money” each.

I’ve emailed you separately for your mailing address. Thanks for participating.

amol April 11, 2012 at 2:06 AM

Vinay,

I have sent you one email which has attachment so could not post here.
Please help me with that

thanks in advance

Amol

Vinaya HS April 11, 2012 at 10:47 AM

@amol –

I have received your email. :-) Will respond.

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