Fixed Deposit: Nominal interest rate or Real interest rate

A recent advertisement by a popular bank offering 9.25% annualized yield on 36 month FD. The ad
attracted my interest and I was sure it also attracted many people looking for high interest rate FD’s.
but the bank has mentioned the annual yield not annual interest rate. The basic difference between
interest rate and yield are with examples

If I deposit Rs 1,00,000 with 8.25% interest for 36 months we get 27,760 as interest

If we calculate yield = 27760/(1,00,000 x 3) x100= 9.25%

This is how the ads shows 9.25% instead of 8.25% interest rate. The annual yield is simple interest.

Whether the yield is useful?

There are cases when yield can be used for comparison. One case would be when you want to
compare FD with same life years but having different interest rate and different compounding
frequency.

We have two investment option with better returns

a) Rs 1,00,000 with interest rate of 8.50% compounding annually for 2 years

b) Rs 1,00,000 with interest rate of 8.25% compounding quarterly for 2 years

In the first option (a) the interest would be Rs 17,723 and in second option (b) the interest rate
would be Rs 17,742 (difference between a & b is Rs 19). The yield would be first 8.86% and second
8.87%.

As investor we have to understand the interest rate and annual yield on fixed deposit. The ads do
not give the accurate details about the returns , its the investor responsibility to dot he calculation
before investing