Lesson 4 of 5 · 12 min

Add-on rates and certificates of deposit

With an add-on rate, interest is added on top of the principal invested, so the rate is a true return on the amount invested, although still simple and not compounded.

In short

An add-on rate (AOR) adds interest to the principal: $FV = PV \times (1 + \frac{Days}{Year} \times AOR)$ .
Price: $PV = FV / (1 + \frac{Days}{Year} \times AOR)$ . Rate: $AOR = \frac{Year}{Days} \times \frac{FV - PV}{PV}$ .
Bank CDs, repos and MRR indexes are typically quoted on an add-on basis.
The quoted amount differs: face value at maturity for discount instruments, price at issuance for add-on instruments.
Selling before maturity: discount the fixed redemption amount at the current add-on rate for the days remaining.

Unlock this lesson free for 7 days

Create a free account to get 7 days of full access — every lesson, video, flashcard, mock and the question bank. No card needed.

Start your 7-day free trial Log in