Investors often use annual percentage rates to determine the cost of financing, and the measurement is also used to determine the additional interest cost associated with borrowing money. From time to time, however, investors may find it necessary to gauge exactly how much their investment has returned over several years. By calculating the annual percentage rate (APR) for an investment, you can determine the amount of profits, as expressed as an interest-rate yield, to compare it with other types of investments.
1. Determine the length of time you held the investment in years, expressed as a decimal. For partial-year holdings convert months to a decimal by dividing the number of months the investment was held by 12. Set this variable as T. For example, if an investor held a stock for two years and nine months, then T would equal 2.75.
2. Determine the total amount of dividends each share produced during the time you held the stock, and make this variable D. Continuing with the example from the previous step, the stock paid three dividends while the investor held it of $1, $1 and 50 cents, so D = $2.50.
3. Look up the stock’s price at purchase, and assign this price as P1. Look up the stock’s current price, and assign it as variable P2. The example stock was purchased for $5 per share, and is now worth $5.75 per share, so P1 = 5, and P2 = 5.75
4. Apply the assigned variables to the formula: APR = ([D + (P2 – P1)]/P1)/T. In the example: APR = ([2.5 + (5.75 – 5)/5)/2.75. APR = 24 percent.