If you have an annual preferred return of 9.0%, which of these is the correct way to calculate the daily interest rate? I typically do A, but came across one of our GPs doing B and I am not sure which is more precise.
A) 9.0% / 365 = 0.0247%
B) (1+9.0%)^(1/365)-1 = 0.0236%
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B is more precise, but the partnership docs will usually outline which method to use.
Can you elaborate? For example, imagine you invest $1,000 for exactly 1 year (365 days). If you calculate the daily interest for every single day (ignoring compounding), using method A will result in total interest of $90, which is exactly 9.0%. Using method B will result in total interest of $86.19, which is 8.6%.
If I'm not mistaken, option A is the simple interest rate, option B is the compounded interest rate. In your example, if you don't ignore compounding (aka use the following formula [=1000*(1+((1+9%)^(1/365)-1))^365-1000]) you will get to $90
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