Analysis of performance

Cash performance

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%.