How to Calculate the Equivalent Interest for an Investment Return

Calculating the equivalent interest rate helps you measure the investment performance.

Calculating the equivalent interest rate helps you measure the investment performance.

One of the ways to compare different investment options is the rate of return or interest rate. Since stocks and mutual fund returns aren't fixed, you don't get an annual interest rate for the returns. If you want to compare investment returns to interest rates, you must calculate the equivalent interest rate on the stock investment by yourself. To do so, you need to know how much you invested, how much you earned and how long it took the investment to grow.

Divide the final value of the investment value by the initial investment to figure the ratio. For example, say you invested $4,000 and now it's grown to $4,400. Divide $4,400 by $4,000 to get 1.1.

Divide 1 by the number of years you held the investment. For example, if you held the investment for three years, divide 1 by 3 to get 0.3333.

Raise the Step 1 result to the power of Step 2. This will require a scientific calculator, which will usually note the power function as "x^y" or simply "^." In this example, raise 1.1 to the 0.3333 power to get 1.0323.

Take away 1 from the result to figure the annual equivalent interest rate to the investment return as a decimal. In this example, subtract 1 from 1.0323 to get 0.0323.

Multiply the annual rate by 100 to convert to a percentage. In this example, multiply 100 by 0.0323 to get 3.23 percent per year.

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About the Author

Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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