Incorrect ISA interest.

rb10

Cardew wrote: »

If you take a investment started 30 June 2008 the equation is:

3000*0.0615*(184/366 + 181/365)

Which produces a figure lower than your minimum for either a 1 or 2 year(or longer) deal.

Not by much but enough to prove the principle!

Isn't the interest compounded on 31st March at Nationwide, regardless of your start date? So you would actually get

3000*0.0615*(184/366 + 90/365) = 138.2472
And then...
3138.2472*0.0615*91/365 = 48.1184

So the total for your example would be that you would actually receive £186.37, compared to an 'expected' 3000*0.0615 = £184.50.

sloughflint

Cardew wrote: »

Actually I believe that it would be 304 days

The 305 days was meant to be 1st April to 30th January.

Cardew wrote: »

If you take a investment started 30 June 2008 the equation is:

3000*0.0615*(184/366 + 181/365)

No I don't agree. That date would also give a better outcome. Don't forget that the interim interest payment will have a positive knock on effect so the equation will be a bit more complex than above:
[1+(185/366+90/365)*0.0615]*[1+(90/365)*0.0615]= 1.062116>1.0615 ( for a one year bond.

Pretty hard to work out how many dates would be unfavourable because there are two facts to take into onsideration ( leap year and compounding)
Just out of interest I took a look at what difference a two year bond would make for start dates of 31 Jan 07 and 08 and 09 with your starting balance:

start 31/01/07 : £31 565.32
start 31/01/08: £ 31 565.97
start 31/01/09: £ 31 565.34 ( no leap year, all 365)

sloughflint

Cardew wrote: »

It is not the case that everything is stacked against the 31 March 2008 start date. Any similar investment started between 31 March 2008 and 30 December 2008 will produce a shortfall.

Sorry to disagree again but in fact I've just taken a look at a few random dates in this date range and they all came out more favourable.
I haven't thought through exactly why ( except I suppose the compounding must have a stronger influence than the fact that Feb 29 is not included) but the only date I got for less favourable was for an investment on 01/04/08.

Not sure where the break even point is. Bit too complex an equation.

rb10

sloughflint wrote: »

Sorry to disagree again but in fact I've just taken a look at a few random dates in this date range and they all came out more favourable.
I haven't thought through exactly why but the only date I got for less favourable was for an investment on 01/04/08.

I think it's because of the compounding on 31st March. This is not taken account of in the AER, but does make a significant difference (except, of course, for dates around the end of March).

sloughflint

rb10 wrote: »

I think it's because of the compounding on 31st March. This is not taken account of in the AER, but does make a significant difference (except, of course, for dates around the end of March).

Yes that's the conclusion I am coming to as well. But it's not exactly a neat formula to pin point exactly.

rb10

I make it that you will lose out if a one year fixed rate account was opened between 1st and 12th April 2008.

On a rate of 6.15%, the most you would lose out on is 12 pence, over the year.

For all other dates, you benefit (due to the extra compounding in March).

masonic

Cardew wrote: »

So to keep the arithmetic simple.

If I invested £1000 @ 10% for 1 year on 31 March 2008 on maturity I would expect to receive £100 interest.

Now do we not agree that given NW's accounting methods I will not get £100?

I disagree. If you open and fund the account on the 31st March 2008, then you will get £100 on maturity.

However, if you open the account in January and don't fund it until 31st March, the account actually runs into a second year such that the invested funds are there for a full year, but interest is calculated and paid as if the account was started on the date it was opened.

For example, if you open the account on the 15th Jan 08, then fund it with £1000 on the 31st Mar 08, you get the following...

Year 1:
15th Jan 09-30th Mar 09: Balance £0, interest £0 x 0.1 x (76/366)
31st Mar 09-14th Jan 09: Balance £1000, interest £1000 x 0.1 x (290/366) = £79.23

Year 2:
15th Jan 09-30th Mar 09: Balance £1000, interest £1000 x 0.1 x (75/365) = £20.54

Total: £99.77 over the 441 days.

Edit: Note the bits in bold - during the leap year the account was open and unfunded for an extra day, hence the slightly smaller fraction of the year the money was there earning interest.

Also, if you open any instant access savings account (where interest is paid every 31st Mar) and do exactly the same as above, closing the account on 31st Mar 09, then interest would be calculated in exactly the same way.

sloughflint

masonic wrote: »

I disagree. If you open and fund the account on the 31st March 2008, then you will get £100 on maturity.

LOL. I seem to be disagreeing with you now.

I don't think it would be £100.
One day's interest for 31/03/08: 1000*0.1/366= 0.273
New capital balance 1000.273
This earns interest split at calendar year end: 1000.273* ( 275/366+89/365)*0.1=99.547
total interest= 99.547+0.273=£99.82 for £1000 invested between 31/03/08 and 30/03/09.

masonic wrote: »

For example, if you open the account on the 15th Jan 08, then fund it with £1000 on the 31st Mar 08, you get the following...

Year 1:
15th Jan 09-30th Mar 09: Balance £0, interest £0 x 0.1 x (76/366)
31st Mar 09-14th Jan 09: Balance £1000, interest £1000 x 0.1 x (290/366) = £79.23

Year 2:
15th Jan 09-30th Mar 09: Balance £1000, interest £1000 x 0.1 x (75/365) = £20.54

Here you seem to be choosing whether to use 366 rather than 365 according to account year containing an extra day as opposed to calendar year.
We seem to have established that Nationwide use calendar year ( going by the examples people have provided)

masonic

sloughflint wrote: »

LOL. I seem to be disagreeing with you now.

I don't think it would be £100.
One day's interest for 31/03/08: 1000*0.1/366= 0.273
New capital balance 1000.273
This earns interest split at calendar year end: 1000.273* ( 275/366+89/365)*0.1=99.547
total interest= 99.547+0.273=£99.82 for £1000 invested between 31/03/08 and 30/03/09.

If the AER is 10% and the money is invested for exactly one year from the date the account is opened, then by definition the interest must be £100 whether it's in there for 366 days out of 366, or 365 of 365.

Here you seem to be choosing whether to use 366 rather than 365 according to account year containing an extra day as opposed to calendar year.
We seem to have established that Nationwide use calendar year ( going by the examples people have provided)

The calandar year has nothing to do with it, and shouldn't. The AER is the amount of interest earned when the balance is held for a period of one calandar year starting from the date the account is opened. Unless the account year includes the 29th Feb, the leap year cannot affect the amount of interest paid in the account year.

If Nationwide are using calandar years rather than account years, then they are misrepresenting the AER of the account during leap years.

rb10

masonic wrote: »

If Nationwide are using calandar years rather than account years, then they are misrepresenting the AER of the account during leap years.

No, they are using the definition of AER as given by the BBA. See here (section 8):

Where an interest rate is calculated on a basis other than actual/365, the basis should be stated and the AER should nonetheless be calculated on an actual/365 basis.

Actual/365 means that interest is calculated by taking the balance multiplied by the annual interest rate divided by 100, multiplied by the number of calendar days that the balance is held, divided by 365 in a normal year or by 365 or 366 days in a leap year. If making an adjustment for AER purposes, the divisor should be 365 in all years.

Nationwide fit with this entirely:
- Interest is calculated on an 'actual/365' basis, where 'actual/365' is defined as above, to be /365 in normal years, and /366 in a leap year.
- The AER is calculated on an 'actual/365' basis, with the divisor as 365 in all years, whether or not it's a leap year.

So it is the code of conduct by the BBA that sets down this - the AER does not have to represent changes in the fact that interest is calculated differently in leap years.