Derbyshire bonds - AER food for thought ??

interest_Ted

If, like me, you normally opt for interest to be added annually, believing that this is usually the most lucritive option, then think again with Derbyshire.

When I saw that their bonds offer a better AER on monthly than on annual, I thought it must be a mistake.

I then sat down and worked it out, remembering that the first dollop of interest is after the first month (then monthly or annually). Amazingly it does work out as they state and at first sight I thought I might be 9p per £100 better off after two years by choosing monthly instead of annual interest.

But then I remembered, of course the tax position. Each monthly interest payment has tax taken off before accumulating. Net result after two years, assuming 20% tax, only one penny better off by opting for monthly. And I suppose that will depend on how they do their rounding (my way might not be theirs).

So a better AER might not necessarly mean more interest !

Interesting !:D

Ted

masonic

I think it is just a rounding issue. They will be working with the gross rates for their calculations. For example, 5.45% gross monthly is probably as close as they can get to being equivalent to 5.50% gross/AER without going into a whole string of decimal places.

Another interesting feature of the monthly gross -> AER conversion is it only works for a constant balance. If you make regular deposits or regular withdrawals, the effect of compounding in the case of monthly interest will skew the effective AER either below or above that of annual interest.

For example, assume you put £1000 into an account for one month. If you are being paid annually, it will make no difference which month it is in the account; if you are being paid monthly, you will get more if it is there in the 1st month than if it is there in the 12th month.