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Compound Interest

November 3, 2020 • 2 min read

Arguably speaking compound interest can be considered “interest on interest.”

The term “compound interest” refers to the total amount of interest calculated, not only on initial investment or loan but also on the accumulated interest obtained from previous years.

Compound interest can be calculated annually, quarterly, or monthly depending on the type of investment or loan provided by the financial institution. There are also two types of compound interest, namely periodic and continuous compound interest.

How do you calculate compound interest?

Compound interest is calculated using the following formula:

A = P (1 + r / m) mt

A: total value of the final investment

P: initial capital provided for the investment

r: the percentage investors will receive on their investment

m: the amount of time the investment is compounded (i.e. annually, quarterly, monthly)

t: the total amount of years, or months the investment will take to complete.

Here is a look at some real-world examples of compound interest at work.

Why is compound interest better?

Banks and fund managers will usually opt for investors to invest larger portions of money for longer periods as it offers better compound interest. Investors will usually see their initial investment growing faster as time progresses, allowing them to increase their wealth a lot quicker.

What are the types of compound interest?

Periodic Compound Interest: Investors will negotiate with financial institutions or fund managers on a decided interval at which the initial investment will receive interest. This can be monthly, quarterly, or annually.
Continuous Compound Interest: This is applied to initial investments with the smallest intervals possible, using the basic compound interest formula as previously discussed. This is the latter of the two, and most financial institutions won’t normally make use of continuous compound interest as a rule.

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² Represents an average net realized internal rate of return (IRR) with respect to all matured investments in your portfolio, utilizing the effective dates and amounts to and from the investments and net of management fees and all other expenses charged to the investments. Past performance is not a reliable indicator of future results and should not be relied upon as the basis for making an investment decision. All securities involve risk and may result in significant losses, including the loss of principal invested.[read more]

³ "Annual interest," "Annualized Return" or "Target Returns" represents a projected annual target rate of interest or annualized target return, and not returns or interest actually obtained by fund investors. “Term" represents the estimated term of the investment; the term of the fund is generally at the discretion of the fund’s manager, and may exceed the estimated term by a significant amount of time. Unless otherwise specified on the fund's offering page, target interest or returns are based on an analysis performed by Yieldstreet of the potential inflows and outflows related to the transactions in which the strategy or fund has engaged and/or is anticipated to engage in over the estimated term of the fund. There is no guarantee that targeted interest or returns will be realized or achieved or that an investment will be successful. Actual performance may deviate from these expectations materially, including due to market or economic factors, portfolio management decisions, modelling error, or other reasons.

⁴ Reflects the annualized distribution rate that is calculated by taking the most recent quarterly distribution approved by the Fund's Board of Directors and dividing it by prior quarter-end NAV and annualizing it. The Fund’s distribution may exceed its earnings. Therefore, a portion of the Fund’s distribution may be a return of the money you originally invested and represent a return of capital to you for tax purposes.

⁵ Represents the sum of the interest accrued in the statement period plus the interest paid in the statement period.

⁶ The internal rate of return ("IRR") represents an average net realized IRR with respect to all matured investments, excluding our Short Term Notes program, weighted by the investment size of each individual investment, made by private investment vehicles managed by YieldStreet Management, LLC from July 1, 2015 through and including July 18th, 2022, after deduction of management fees and all other expenses charged to investments.

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