Compound or simple interest?

Slicker777

Say if it is 36.5% AER and interest is paid daily does that mean you get 0.1% daily? Say like Day 1 - £10 and interest on Day 2 would be £10 + £0.01 and for Day 3 thats compounded?

Pitchshifter

Thanks rb10 I feel most reasured now, the figure that calculation comes to is similar to the one I had. Although it is lower than the Halifax calculator.

I'd really like like to know how you arrived at that figure, so I can make an accurate spreadsheet.

rb10

Pitchshifter wrote: »

Thanks rb10 I feel most reasured now, the figure that calculation comes to is similar to the one I had. Although it is lower than the Halifax calculator.

I'd really like like to know how you arrived at that figure, so I can make an accurate spreadsheet.

You start off with £x in the account.

The interest rate is 5.25%, so this is the same as multiplying the balance of the account by 1.0525.

At the end of the first year, you have

x * 1.0525

At the end of the second year, the pay 5.25% on this balance, so it's

(x * 1.0525) * 1.0525 = x * (1.0525)^2

And so on, so that by the fifth year, you end up with a total balance of

x * 1.0525^5

Or, if you just want the interest that's paid, and not the initial investment, then it's

x * 0.0525^5

JimmyTheWig

rb10 wrote: »

Or, if you just want the interest that's paid, and not the initial investment, then it's

x * 0.0525^5

So good until this point!

Interest paid will be
x * (1.0525^5 - 1).

JimmyTheWig

Slicker777 wrote: »

Say if it is 36.5% AER and interest is paid daily does that mean you get 0.1% daily? Say like Day 1 - £10 and interest on Day 2 would be £10 + £0.01 and for Day 3 thats compounded?

No.
If you invest £100 at 36.5% AER then after a year (assuming you leave any interest paid in the account) you will have £136.50.
This will be the case whether interest was paid annually, monthly, daily, whatever. That's the beauty of AER.

I believe in your example you would get around 0.085% a day.

rb10

JimmyTheWig wrote: »

So good until this point!

Interest paid will be
x * (1.0525^5 - 1).

Doh!

Schoolboy error!

Thanks