Apologies for what will be a stupid question to most.

niceshoes_2

This is a very obvious question to many, but not to me, so apologies for asking a silly question.

If an accounts interest rate is advertised as 4.65% gross (3.72% net), fixed for 1 year, does this mean that for every £1000 saved in that year, then £37.20 will be earnt in interest?

Is it really as simple as that or am I missing something?

tomstickland

Yes if there is no compounding of interest. If there's compounding then you will earn more interest.

niceshoes_2

Thanks for that - can you explain what compounding of interest is please? Sorry I really am very new to this saving malarky!

mad

Hi here is an article on compound interest

http://www.fool.co.uk/school/compound.htm

tomstickland

If the interest was calculated and paid monthly then you'd receive 1/12th of the gross rate 12 times per year. Compounding would mean that the previous interest payments were also included in subsequent interest calculations. The AER (annual equiv rate) includes compounding.

Typically, for a monthly payer
AER = 100* ( ( 1 + G/100*(1/12) )^12 - 1)

ie: work out the monthly multiplier, apply this 12 times and then convert back into a percentage.

Debt_Free_Chick

niceshoes wrote:

This is a very obvious question to many, but not to me, so apologies for asking a silly question.

If an accounts interest rate is advertised as 4.65% gross (3.72% net), fixed for 1 year, does this mean that for every £1000 saved in that year, then £37.20 will be earnt in interest?

Is it really as simple as that or am I missing something?

Yes - but only if you put £1,000 in on day one as a lump sum. Your calculation will not apply if you put in £1,000 in total, but spread over several payments.