Question

Explain the importance of annualizing an interest rate the correct way for financial decision making. Provide an example.

Answer 1

An annualised rate of return is computed as the identical yearly return a financial specialist gets over a given time frame. The Global Investment Performance Standards manage that returns of portfolios or composites for times of short of what one year may not be annualised. This avoids "anticipated" execution in the rest of the year from happening.

Annualized returns will be returns over some stretch of time downsized to year duration. This scaling procedure enables investors to equitably look at the profits of any advantages over any timeframes.

Suppose you have two investment options, one offers 12% interest arte per year, another offer 12% per year compounded monthly.

To compare both options we need to find effective interest rate of the second option.

It will come to be above 12%.

That is the reason interest rate of investments are annualised.

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Hope this answer your query.

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