Interest calculations...A lesson learned the hard way, or is this just wrong?

opinions4u

tuggy12 wrote: »

Not true, every bank I currently have funds in does this, except where the funds are invested for a fixed period and the interest is added on maturity.

They calculate daily. They don't compound daily though.

This means that an Egg customer earning the same AER as, say, an RBS customer would get the same interest on identical balances held for a year, but slightly less interest if they closed their account at the same point part way through a year.

Most providers, where interest is added annually, pay (1+(RATE/100)) divided by 365 daily.

Egg pay (1+(RATE/100)) to the power of (1/365) daily.

oldfella

I think this fairly conclusively proves they compound daily ..

[FONT=Arial, Helvetica, sans-serif]6.2 Interest will be calculated on a daily compound basis to achieve the advertised annual rate. This means that we will calculate interest on the amount which is in your account at the end of each day plus the amount of any interest which has accumulated but which has not yet been paid to you or added to your account.

How they get away with advertising it as 3.25% Gross/AER is beyond me. Its also probably in breach of banking regulations - [/FONT] “Code of conduct for the advertising of interest bearing accounts” issued by the BBA on the 11th June 2007.
(http://www.bba.org.uk/bba/jsp/polopoly.jsp?d=135&a=261)
Clause 8 states “Advertisements which quote a rate of interest must quote the Annual Equivalent Rate and the contractual rate”
And … “Where contractual rates are quoted on the basis of other than a 12 month period, this must be clearly stated”.

The contractual rate is the rate interest is applied which is about 3.2%

tuggy12

For the AER to function correctly, in all situations, the interest must be compounded daily, otherwise for short term deposits the AER would be incorrect.

In other words if I make a deposit in an account for say 3 days, then the interest must be compounded daily to achieve the correct AER.

oldfella

tuggy - there is a distinction between calculated daily and compounded daily. All savings calculate daily, and the interest is either added monthly or annually. Egg calculate daily and add the interest daily, then the next day calculation includes yesterdays interest ... etc etc

tuggy12

oldfella wrote: »

tuggy - there is a distinction between calculated daily and compounded daily. All savings calculate daily, and the interest is either added monthly or annually. Egg calculate daily and add the interest daily, then the next day calculation includes yesterdays interest ... etc etc

The Egg account referred to by the OP has the interest compounded on a daily basis and the total compound interest is added to the account annually.

Some banks may add the interest monthly and some annually but it is always calculated on a compounded daily basis.

opinions4u

tuggy12 wrote: »

The Egg account referred to by the OP has the interest compounded on a daily basis and the total compound interest is added to the account annually.

Some banks may add the interest monthly and some annually but it is always calculated on a compounded daily basis.

When are you going to accept that you are simply wrong?

YorkshireBoy

tuggy12 wrote: »

...it is always calculated on a compounded daily basis.

tuggy, as per post #20, please could you provide a link to your account T&Cs so I can have a look.

tuggy12

opinions4u wrote: »

Most providers, where interest is added annually, pay (1+(RATE/100)) divided by 365 daily.

That is incorrect, try it yourself.

opinions4u wrote: »

When are you going to accept that you are simply wrong?

My bank statements confirm I'm correct.

Reaper

tuggy - you will see that accounts that offer the option of interest paid monthly or annually have a lower contract rate but the same AER if you choose the monthly option. That is because when the interest is applied it begins to compound so the monthly rate is lower to compensate.

If interest were compounded daily regardless of whether or not it was applied then this variation in rates would be unnessesary.

xrjtg

opinions4u wrote: »

Most providers, where interest is added annually, pay (1+(RATE/100)) divided by 365 daily.

Egg pay (1+(RATE/100)) to the power of (1/365) daily.

A clarification:

almost_opinions4u wrote:

Most providers, where interest is added annually, pay (RATE/365)*BALANCE daily.

Egg pay ([(1+RATE) to the power of (1/365)] - 1)*(BALANCE+accrued but unpaid interest) daily.

This doesn't address the heart of the disagreement.