Yield calculation

Dear Dr. Don,
I once read in a financial magazine about a formula to calculate your rate of return on a mutual fund if you purchased it at some time other than the first of the year. I didn't keep the article but now would like to know how to do this. Can you help?
Frank Financial

Dear Frank,
I can help, but I want to warn readers with math anxiety that they may want to skip to the next question.

First, find your holding period yield (HPY). Determine the current value of the investment (P1). Subtract the initial value of the investment (P0) from (P1) and divide by (P0). That's your holding period yield.

HPY = {P1-P0}/P0
HPY = (\$1,020-\$1,000)/\$1,000  =  .02 = 2%

To convert the holding period yield to an annual yield (APY) you'll need to know how many holding periods (n) there are in a year. For example, there are four three-month holding periods in a year. Add one to the holding period yield and raise this to the nth power. Subtract one from that result and you've got your annualized yield.

APY= {(1+ HPY)^n} --1
APY={(1+. 02)^4} -1 = . 08243 = 8.243%

Or, you can skip all this and use the total return calculator at Bloomberg.com.

Either method will come in handy during the holiday season when you want to captivate others with how well you're doing in the market. Be careful when comparing your results with neighbors or relatives since they tend to fabricate, rather than calculate, their yields.

Building Credit

Dear Dr. Don,
What can I do to build credit?
Connie Concise

Dear Connie,
Buy things using credit. Make the payments on time. Start with a secured credit card if you can't get a regular (unsecured) credit card. Live within your means. Never borrow at 22 percent when you can borrow at 15 percent. Don't accumulate credit cards like a philatelist would postage stamps. Don't carry balances at 15 percent when your savings are earning 2 percent.

For more tips, scroll through our Basics section on Managing Your Credit.

 Related information: Dr. Don's biography Submit a question to Dr. Don Archive of Dr. Don columns

-- Posted: Nov. 5, 1999

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