# Interest amount: Interest is generally paid on capital invested in debt instruments, such as bonds and mutual funds, as well as cash investments, such as savings accounts and certificates of deposit (CD). Interest can be either simple or compound. Simple interest is the interest calculated on the principal amount and does not take into account the time value of money (which refers to inflation/deflation and increases or decreases in the purchasing power of the invested capital). Compound interest is calculated on both the principal and the interest accrued over 12 months.
Interest and capital appreciation together form the total return on investment (ROI). For instance, if a bond is purchased at $20 and pays $2 as interest annually and the bondholder sells the bond for $25 after 12 months, then the ROI is $7 ($5 of capital appreciation and $2 as interest).
Different methods are used to calculate interest in varies types of securities:
* Stock dividends, US mortgages and GIC - Simple interest is calculated.
* Bond yields - compounds interest every six months.
* Bond coupons - are accrued daily and measured as simple rate.
* Stock indexes - Interest compounds annually on the price alone.
* Stocks and mutual funds - compound every time cash flows to/from investors.
* US normal mortgage - interest is measured as simple rate.Download