Once again, will need your brains to help me out with something.?

Question

I need your help to help me figure out something.
If I have an investment that pays out 1% every month and I reinvest that 1% into the fund, what is the rate of return I get by the end of the year?

Here's the math. I invest $100000 into a fund. The fund pays out 1% for every dollar that i invest in. So, each month, I get $1000. At the end of the year, I get $12000 total.

But what if I take the $1000 and reinvest it into the fund. So, I get extra $10 for second month, $10.10 third month, $10.20 forth month, etc... I compound the investment.

So, at year one, what rate of return do i get? and second year as well?

I have a general idea of 6% but can anyone confirm this with me?

thank you

Answer 1

I get 7.9% for the 1st year; 12.68% for the 2nd.

Answer 2

What you are asking for is called compound interest and this is what banks mean when they quote their annual interest rates (%pa). When they mention monthly interest to you, they take the annual rate and calculate backwards. This is why the monthly rate is less than 1/12th of the annual rate. For example, 12% pa is 0.945% pm

In your particular example, $100,000 invested at a true 1% pm compound interest (ie with the monthly interest reinvested) will, after 12 months, become $112,683 and the annual interest rate is 12.683%