Investments

As the interest is calculated and paid monthly on the cash account, you need to establish what the monthly interest rate is.

We divide the interest rate of 2.5% by 12, which is 0.21% (or .0021). This is paid each month and is retained in the account, and operates in the same way as the compounding example used earlier in the module.

If you have a scientific calculator or use Microsoft excel for calculations there is a quick way of calculating compound returns instead of each month’s interest. The formula for working out compounding interest is:

Interest = the capital sum x (1 + interest rate/ periods) to the power of the number of periods.

= $100,000 x (1.0021)^12 = $102,549.31. The total return is $2,549.31 interest on your $100,000.

To express this as a percentage it is $2,549.31 divided by $100,000. The return for cash is 2.55% (0.0255). The effect of compounding monthly means you receive a higher return over the year than the simple interest rate of 2.5%.