A Note consists of 3 main components: the principal amount, the return rate and the number of months for payment. There are many types of return rate calculations. The two most common types are simple return rate and effective return rate.
SIMPLE RETURN RATE
As the name suggests, simple return rate is meant to be intuitive and easy to understand. Hence it is the return rate of choice at Funding Societies, so that everyone knows the actual returns they can expect from each Note.
Simple return rate per year = return / Principal / Payment Months * 12
Investment amount: RM 100,000
Investment tenor: 12 months
Simple return rate: 10% p.a.
Total dollar return for investors: RM 100,000 * 10% = RM 10,000
Payment from SMEs / to investors are in equal monthly payments of principal and return
EFFECTIVE RETURN RATE
Effective return rate calculates the returns as if the monthly payment is reinvested at the same rate till the end of the tenor. It takes into account compounding effect and the frequency of installments over the period.
There is no “simple formula”, but it can be calculated using the RATE function in Excel.
RATE (nper, pmt, pv, [fv], [type], [guess])
Nper : Number of payment periods
Pmt : Payment made each period, includes principal and return but not fees
Pv : The present value that a series of future payments is worth now
Fv : The future value that you attain after the last payment is made