How to determine whether calculated DAILY or monthly, if we know gross rate, and AER?

Daniela_2

If we know the gross rate, AER and the net rate, should that give us enough information to calculate whether the rate is daily calculation or monthly?

so if the :
gross rate is: 4.17
AER: 4.25
Net: 3.34

would this rate be based on :

a)daily calculation and monthly paid
(day 1 balance= deposit + interest
day 2 balance = day1 balance + interest of the day 1 balance)
. . . and so on . .

b)monthly calculation and monthly paid

and What would be the formula to calculate this please?

kind regards

daniela

Jonbvn

AFAIK, all banks calculate interest daily and pay the interest either monthly or yearly, with the exception of some fixed term accounts. If paid yearly than gross rate = AER.

opinions4u

The all calculate interest daily. If they didn't, we'd all pay in a large sum on the last day of the interest calculating period and walk off with heaps of interest, tipping the banks over the edge.

The calculation for AER where the interest is added monthly is:
1+(gross rate / 12) ^ 12

If the interest is added quarterly:
1+(gross rate/4) ^ 4

If the interest is added half yearly:
1+(gross rate/2) ^ 2

Daniela_2

Would you spell this out for me please:

Does it work like this:

A) (Day 1 Balance= Fund+ Interest
Day 2 Balance = Day1 Balance + Interest of the Day1 Balance)
. . . and so on . .

ie. day 1: 100.000
day 2 100.010 (Let's assume the earning for 100.000 was 10 pounds for the first day)
day 3 100.021 (Let's assume the earning for the interest was 1 pound for the 10 pound interest of the previous day)

Or it goes like this:


Day 1 10.000
Day 2 10.010
Day 3 10.020
(which means you don't earn interest on the interest on the B option)

So which one is correct?
A or B? or none of them, if so, how please?

oldfella

post 2 answered this - if interest is paid monthly, you earn interest on the interest in the second month. If interest is annual then you earn interest on the interest in the second year

Daniela_2

I am afraid that is not the answer for my question

please read my earlier posts

and pick A or B or if none correct, then tell me a C example please

oldfella wrote: »

post 2 answered this - if interest is paid monthly, you earn interest on the interest in the second month. If interest is annual then you earn interest on the interest in the second year

Lansdowne

You are right Daniela, your question was not answered.
The answer is B. The interest is calculated 'daily', more accurately it is calculated 'per day' but it's calculated only on the original amount.

The interest is only added to the original amount on the day (once a month, once a year etc) that it is credited to your account.

Daniela_2

Appreciate that very much, Lansdowne,

all the best

daniela

Lansdowne wrote: »

You are right Daniela, your question was not answered.
The answer is B. The interest is calculated 'daily', more accurately it is calculated 'per day' but it's calculated only on the original amount.

The interest is only added to the original amount on the day (once a month, once a year etc) that it is credited to your account.

sloughflint

Daniela wrote: »

If we know the gross rate, AER and the net rate, should that give us enough information to calculate whether the rate is daily calculation or monthly?

so if the :
gross rate is: 4.17
AER: 4.25
Net: 3.34

would this rate be based on :

a)daily calculation and monthly paid
(day 1 balance= deposit + interest
day 2 balance = day1 balance + interest of the day 1 balance)
. . . and so on . .

b)monthly calculation and monthly paid

and What would be the formula to calculate this please?

kind regards

daniela

All savings accounts I have ever come across calculate interest on a daily basis using 1/365th of the gross per annum rate.
At the point the interest is paid ( added on ) to the account then it compounds ( which is where the AER comes in to account for compounding interest).

Your account seems to pay monthly.
For a formula to check this either of these would help check:

12*[(1+a)^(1/12)-1] would give the gpa if a is the AER..... 12*[1.0425^(1/12)-1]=0.0417
or
(1+g/12)^12 would give the AER.

The account that you have drops its interest rate as soon as your balance goes above a limit ( not a great incentive to keep large funds there).
I was trying to explain yesterday that it wouldn't have been until your first interest payment that the threshold would be reached even though the daily interest calculation would be working on a daily basis in the background ( using the higher daily rate).

There was an exception that I recently learnt about. Egg compound on a daily basis ( your A ) but the norm is by far to calculate the daily amounts from the gpa rates.(B)

Milarky

opinions4u wrote: »

The all calculate interest daily. If they didn't, we'd all pay in a large sum on the last day of the interest calculating period and walk off with heaps of interest, tipping the banks over the edge.

I read something about this in relation to Indian (in India) bank accounts and how the interest was lower - or even nil - for certain periods each month. (fascinating stuff..)