What is the TEA of a fixed term

In the current context of economic volatility, The saver looks for alternatives to protect their savings and one of the options they evaluate is to make a fixed termwhich offer a guaranteed income and present a very low level of risk, but few know in depth how these instruments work and One of the components that generates the most intrigue is what ASD is..

The first thing you need to know is that The Central Bank (BCRA) establishes the performance that financial entities must guarantee for this type of investments. That is why we talk about an assured income, because it is regulated. In that sense, it periodically updates the annual nominal rate (TNA), which is currently 133%.

Monthly effective rate

Based on this percentage, the monthly return (or monthly effective rate, TEM) given by the fixed term is calculated, that is, the profit that that investment gives month to month and It is calculated by dividing by the amount of the TNA and in 12so, if we take the current rate of 133% and do the calculation, it will give us a TEM of 10.9%.

That is the information that the saver must follow if they want to calculate how much they will earn in the first month of a traditional 30-day fixed term. Now, if you bet on continuing to renew that investment along with the profit obtained, you must take into account another index, which is precisely the one we want to discover what it means in this note, the Annual Effective Rate (TEA).

TEA of the fixed term: what is it

But what is ASD? It is what could be called as net return on the fixed term because it is the formula that allows you to calculate how much you can earn with a 30-day deposit if the initial capital plus the return is renewed month by month (i.e. the TEM). Right now, that percentage is 253.3%.

This is an important data to compare the profit generated by the 30-day fixed term if the initial capital plus the profit is renewed against annual inflation, while the TEM serves to compare the monthly performance against the inflation data for the month. previous. For example, in the case of September the consumer price index (CPI) was 12.7% and in October the BCRA set the rate at 10.9% monthly.

In that case, you lose the fixed term against inflation, while The annual price increase expected for 2023 is around 180% annually and the TEA far exceeds that percentage, Since, if the monthly fixed term is renewed month by month plus the profit for one year, a profit of 253.3% on the initial capital will be obtained. The calculation that is carried out to reach that percentage is done as follows:

TEA = ( 1+ TEM) 12 − 1

The initial capital is added, it is added to the TEM, it is raised to the twelfth power and the capital is subtracted. That is the correct process, the arithmetic calculation. But for those who do not know this type of operations, there is no need to be scared. There are some web pages that, by completing the current TNA or TEM, automatically inform what the current TEA is.

In addition, The BCRA generally reports the three values ​​when it communicates changes in monetary policy rates.. That is to say, the TNA, the TEM and the TEA are detailed in the statement.