Always ask for the effective annual rate when comparing different financial products KNOWING THE difference between a ‘‘market value ad- justment’’ and a ‘‘penaity’’ can save you quite a bit of money. While some GICs or fixed term RRSPs are locked in, others are redeemable — at different prices. David Chalmers, a retirement and investment specialist at The Rogers Group and handy man with a computer, has produced some ‘‘interest'’-ing figures relating not only to penalties and . adjustments but also to the way tates are calculated and compared. Some financial institutions will allow early redemption of deposits; the penalty is a lower in- terest rate. “For example,”’ said Chalmers, “you put money into a five-year deposit compounding at 8% a year and let’s say you want to cash it at the end of the fourth year. “By then, your deposit would have grown to $13,604.89. That’s called the ‘book value’ as you don’t actually get this amount — you get the 8% growth only if you keep the deposit to maturity.”’ The penalty for cashing in your deposit early is a reduced return of 4%. So $10,000 compounding at 4% produces $11,698.59. That means your cost (or penal- ty) for early redemption is $1,906.30. “A market value adjustment, on the other hand, is more fair to the customer,”’ Chalmers said. “You pay this adjustment only if interest rates are higher when you take early redemption. “A mathematical formula. is us- ed. In plain language, it’s approx- imately the amount of additional interest the GIC company will have to. pay a new depositor at 9% compared with continuing to pay you the agreed-upon 8%. That’s far less than the $1,906.30 penalty in the previous example. “So if interest rates are com- parable, always choose the re- deemable GIC with a market rate adjustment rather than a penal- t aad "He criticized companies that use misleading interest rates when they promote their deposits. For example, if you invest $10,000 compounding at 8% for five years, you will end up with $14,693.28, or $4,693.22 interest. If, on the other hand, the $800 interest had been paid out each year, you would have ended up with your $10,000 principal plus $4,000 interest, for a total of $14,000. Either way, you earned an ef- fective annual interest rate of 8% FH LESS Michael Grenby DOLLARS AND SENSE on your money. “Some companies, however, divide the number of years into the compound interest total,’’ Chalmers said. In the above ex- ample, dividing five into the $4,693.28 gives 9.39. “‘E know of at least one company that uses. this figure in its advertising,’ he said. “You aren’t really getting a higher return on your money. Even when the $800 interest has been added to the $10,000 prin- cipal at the end of the year, you will still earn 8% on the $10,800 in the second year.”’ In the less-than-ethical calcula- tion, when compounding interest has been added to the principal and you divide by the number of years, naturally you get a higher interest figure. “Always ask for the effective annual rate when you compare different financial products,"’ said Chalmers, if you receive monthly interest from your GIC or RRIF, you might think you are being paid a lower rate than if you receive your money annually. “The interest figures are indeed different,"’ Chalmers said. ‘‘But mathematically, the two ap- proaches are identical. Your bot- tom line — the truc return on your money — is the same either way.”’ For exaiple, 8% paid annually produces exactly the same result as 7.7208% paid monthly. You can prove this by doing the calculation: reinvesting each mon- thly payment being paid to you at the same 7.7208% rate for the remainder of the year. When you add up the 12 mon- thly payments for the year plus the interest earned on each mon- thly payment, the total is the same as 8% interest earned at the end of the year on your principal. There may occasionally be a tax advantage to taking income an- nually rather than monthly. For example, investing in a GIC today paying interest annually means you would not have to report any of the interest income until 1993 — and possibly not pay tax on that income until April 30, 1994, _ If you were paid interest mon- thly, you’d have to report all the monthly payments received in 1992 to your 1992 tax return, and pay tax a year earlier on this amount. Mike Grenby is a North Shore-based columnist and in- dependent financial adviser who works with individuals; he will answer your questions as space allows — write to him c/o The North Shore News, 1139 Lonsdale Ave., North Vancouver V7M 2H4, ‘Spring drop-in sports offered THE NORTH Shore Neigh- bourhood House (NSNH) is offering spring drop-in activi- ties to people who are too busy to commit themselves to scheduled sports but still like to get out and participate. Adult drop-in basketball games will be held on an ongo- ing basis on Monday nights from 7:30 to 10:30 p.m. Players will organize the games themselves. The fee is $9, Stop in at Shortstop Brake & Muffler. With our Highest Quality at the Lowest Price Guarantee (and this $25.00 off coupon), you're sure to get rid of your car's pesky ‘‘Squeeks’’ and ‘‘Bangs’”’ for less bucks! 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