Annual rate of return

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Related to Annual rate of return: Average Annual Rate of Return

Annual rate of return

There are many ways of calculating the annual rate of return. If the rate of return is calculated on a monthly basis, we sometimes multiply this by 12 to express an annual rate of return. This is often called the annual percentage rate (APR). The annual percentage yield (APY) includes the effect of compounding interest.

Annual Percentage Rate

The cost of funds or interest rate for an entire year expressed as a single percentage. Significantly, the APR does not account for compounding. For example, if the APR is 36%, the percentage is 3% per month, but the interest rate or cost of funds for the entire year may be greater than 36% due to the effects of compounding. By law, a credit card company or other lender must inform the customer of the APR before any agreement is signed. The APR provides the customer with a convenient number against which to compare the cost of funds for other loans or investments. It is less commonly called the annual rate of return or the nominal annual rate.

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If a collector were to have retained a portfolio of nothing but wines from the 1982 vintage, he or she would have earned a nominal annual rate of return of 13.

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The astute student may notice that the annual rate of return thus calculated does not exactly conform to the data, at which time one introduces the difference between arithmetic means and geometric means.

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For instance, from 1950 through 1985, the correlation between the three different measures of average annual rate of return for the S&P 500, calculated from values of the index at the conclusion of each month (Ibbotson Associates 1987), was nearly perfect (the correlation coefficients were all greater than 0.

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American Capital's compounded annual rate of return earned on its debt and equity securities over the life of its investment was 22%, including dividends, interest, realized gains and fees.

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American Capital's compounded annual rate of return earned on its senior debt, subordinated debt and equity investments since 4Q05 was 18%.

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The annual rate of return of this investment is expected to reach 25 per cent per annum with a forecast to pay 8 per cent dividends to the investors in every year," he added.

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Paul's agent, who is very professionally-dressed, spoken, and mannered, and who was using a computer spreadsheet to present this concept, had explained that the annual rate of return is calculated by recalling that Paul's $100K had grown into a total of $349K that was paid out, which is a gain of $249K, or in percentages a 249% increase over 35 years.

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For example, if Spencer wants an income stream of $5,000 per month until age 80, and he retires at 55, he would have to save more than $11,000 a year, assuming an average annual rate of return of 10%.

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