Interest and capital appreciation together form the total return on investment (ROI). For instance, if a bond is purchased at $20 and pays $2 as interest annually and the bondholder sells the bond for $25 after 12 months, then the ROI is $7 ($5 of capital appreciation and $2 as interest).
Different methods are used to calculate interest in varies types of securities:
* Stock dividends, US mortgages and GIC - Simple interest is calculated.
* Bond yields - compounds interest every six months.
* Bond coupons - are accrued daily and measured as simple rate.
* Stock indexes - Interest compounds annually on the price alone.
* Stocks and mutual funds - compound every time cash flows to/from investors.
* US normal mortgage - interest is measured as simple rate.load