How do I Define Mean Annual Yield?

Understanding mean annual yield can help you reach your financial goals.

Determining the mean annual yield is helpful in analyzing the effectiveness of an investment with a varying interest rate. It can also be used to find out how much a new investment will have to return in order to reach a target. Knowing the mean annual yield and keeping an eye on your investments can help you adjust your strategy and reach your financial goals.



BusinessDictionary.com defines average annual yield as the "total yield on a multiyear certificate of deposit (from which the compound interest earned was not withdrawn) divided by the number of years of deposit." While this definition specifies a certificate of deposit, it can apply to savings accounts, mutual funds, and other investments involving compound interest.

Instructions

Past average yield

1. Subtract the current value of an investment from the total you have put into the investment to find out how much it has made. For example, if you invested $10,000 10 years ago, and it is now worth $15,000, it has made $5,000.

2. Divide the difference by the number of years you have held the investment. Continuing the example, you would divide the $5,000 profit by 10, giving you $500.

3. Convert the average return to a percentage. Divide the average return by the initial investment amount. Dividing $500 by $10,000 gives you .05 or 5 percent.

Predicting annual yield to reach a goal

1. Subtract the initial investment amount from the profit you want the investment to make. For example, if you want a $10,000 investment to reach $15,000, this number is $5,000.

2. Divide that difference by the number of years you want to hold the investment. If you want to reach that $15,000 goal after 10 years, divide $5,000 by 10. The result is $500.

3. Convert to a percentage. Divide the average return by the value of the initial investment. Dividing $500 by $10,000 gives you .05 or 5percent.

Tips & Warnings

• These numbers assume that you do not withdraw any money from the investment. Also, keep in mind that the percentages reached through these calculations are general numbers. Compound interest will give you a return not only on your initial investment, but also on the interest accrued on the investment over the years.

References

• www.businessdictionary.com: average annual yield.

Resources

• www.finaid.org: Annual Yield Calculator