There were some questions on the annualised yield figure that I provided in my previous post on the HSBC Guaranteed Saver Plus.

That figure is based on compound interest and is the most relevant indicator (annualised yield or annualised returns) for you to compare against other similar lump sum investments.

Let’s say you put $1000 in a bank for a year at 2% interest. Assuming the interest doesn’t change at all, after the end of each year, you will have:

1000*1.02=1020

1020*1.02=1040.4

1040.4*1.02=1061.208

1040.4*1.02=1082.43

1040.4*1.02=1104.08

As all your interest in reinvested, your actual annualised yield is also 2%.

1000*1.02*1.02*1.02*1.02*1.02=1104.08

Suppose you use the $1000 to buy a bond that pays you 2% in coupon every year and the principal is returned at the end of 5 years.

After 5 years, you will end up with $1000+20+20+20+20+20=1100.

Even though you are paid an interest of 2% on your bond, your annualised return actually works out to be only 1.92%. This is because your coupons are not reinvested at the same interest rate of 2%.

1000*1.0192*1.0192*1.0192*1.0192*1.0192=1100

For the HSBC Guaranteed Saver Plus product, the annualised yield is obtained by comparing your initial investment and the final maturity value. There is no coupon or yearly payment.

Before the current promotion, this is how the initial investment, maturity value and annualised yield looks like for the different categories:

$25k, $27943, 2.25% (25k*1.0225*1.0225*1.0225*1.0225*1.0225=27943)

$50k, $55885, 2.25%

$75k, $83828, 2.25%

$100k, $113143, 2.5% (100k*1.025*1.025*1.025*1.025*1.025=113143)

With the premium discount that is offered by HSCB, you do not need to fork out the full investment amount upfront. Taking into account the discount, this is how the numbers will look like:

$25k (no discount), $27943, 2.25% (25k*1.0225*1.0225*1.0225*1.0225*1.0225=27943)

$49.4k (1.2% discount), $55885, 2.50% (49.4k*1.025*1.025*1.025*1.025*1.025=55885)

$73.2k (2.4% discount), $83828, 2.75% (73.2k*1.0275*1.0275*1.0275*1.0275*1.0275=83828)

$98.8k (1.2% discount), $113143, 2.75% (98.8k*1.0275*1.0275*1.0275*1.0275*1.0275=113143)

Hope this makes it clear.

P.S. I have been working on too much excel sheets. The * in the posts actually means x (or multiply).