Calculating interest on irregular investments

bushla

Hi,

Hope you can possibly help. Is there a way to work out your annual interest rate return if you're investing on an irregular basis?

e.g. premium bonds - you originally invest £2k December 2006; you then invest a further £100 each fortnight, you then stop Feb 2007 and then make a further lump sum investment April 2007.


Many thanks


Anthony

oldfella

you dont receive interest on premium bonds

Milarky

Premium Bonds don't pay 'interest' (you either win a share of the 'interest' or win nothing at all in a particular draw)

But interest is nearly always worked out in a standard way - as:

'average balance' x 'interest rate'

Where the interest rate changes from time to time you must subdivide periods of time - eg:

'average balance in period 1' x 'interest rate in period 1' + 'average balance in period 2' x 'interest rate in period 2'

And whenever is interest is compounded, you have to add it to balance and start calculating in the new period.

Try Googling 'calculating interest' for some more descriptions if that will help

InMyDreams

But to do that Milarky, you have to know that the interest rate is. I think the OP wants to work out what sort of interest rate would have been equivalent to what he's won over time.

I did something similar when trying to decide whether or not keeping my endowment had been worth it over the last year or so. I nearly cashed it in in Oct 05. Had I cashed it in and put it in a savings account, along with the premiums since, what level of interest would that account had to have had to make the balance equivalent to what the endowment is worth today.

I ended up having to do it on a spreadsheet, to calculate monthly, and using trial and error imputing different interest rates for my imaginary savings account until the end balance was the same. Not a very neat solution, but worked for me and would be easy to tweak to change the initial lump and subsequent irregular 'investments', and it would give an accurate result.

PM me if you want to give it a go.

bushla

Poor wording on my behalf - I meant calculate the annual rate of return (rather than interest). Thank you for the feedback.

I think the easier method, as both Milarky and InMyDreams have stated, is work out an average return over a shorter period,

so with premium bonds calculate the percentage return of compounded investment on a monthly basis and then take the mean average over 12 months