Bank's calculation of interest

zelda2007

Hi guys, I wonder if anyone knows the answer to this question re: how banks calculate interest.

Example - Mr A has £2,500 sitting in an ISA earning 5.5% interest, paid annually. He should recieve £137.50, which is 2500 x 0.055.

But the interest on the account is calculated daily (despite being paid annually) - so assuming the balance remains at 2500 for the whole year, it would be the £137.50 divided by 365 = 0.3767.

My question is: would the bank count the day's interest as 37p or round it up to 38p?

Obviously it's not only a penny a day difference but I'm curious lol

natweststaffmember

not sure on that one but knowing banks the way i do the likelyhood is down:)

bengal-stripe

I seem to remember, just like currency exchange rates, it gets calculated to six digits beyond the decimal point:
like 0.376712 - i.e. to 1/10,000th of a penny, to be carried throughout the year. That ought to be accurate enough.
At the end of the year that will be 137.49988.

At the end of the year, that last 1/10th of a penny gets rounded up or down (5-9 get rounded up, 1-4 get rounded down). You’ll be getting £ 137.50.

Happy???

Sillychuckie

I think its up, and I'll tell you why.
One month, I had a penny in a current account with barclays.
The penny was only present in the account, for one day out of that month.

When it came to paying interest, I received 1p interested.
Not only was my investment doubled, but I didn't pay tax on it either. The interest calc must have been 0.x, so it would have been rounded up to pay me the 1p interest.

I only remember all this, because it occured to me.
If I could write a piece of software that deposited 1p in billions of my bank accounts for just one day, I'd get a return of investment of 100% each month (and make a fair bit of money, tax free and legally)...
Naturally, having visited my high street, they don't seem to want to offer me more than the one account. :rotfl:

LittleVoice

Lucky Sillychuckie. I guess it could work where interest is paid on pence as well as pounds. A lot, if not most, institutions pay it on whole pounds only.

King_Weasel

zelda's question has prompted another: how often is interest credited for interest calculation purposes? On accounts where you can pay in or out on any day, banks clearly have to take into account the date of the transaction. (In principle, they could take into account the time as well, but they don't, except to define when one day ends and the next starts.) But when do you get interest on the interest of your deposit? Is it only when the next month starts, or does it start straight away even though your statement only displays interest credits monthly? Remember, I'm asking about compounding here - I know my deposit earns interest straight away, but when does the interest earn interest?

Hope I've made this clear enough without a numerical example.

CLAPTON

it depends upon the T&Cs of the a/c
some do it daily
some monthly
some three monthly
some sixmonthly
some yearly

masonic

Most accounts I've seen calculate interest on the cleared balance of your account at the end of each day. So, interest tends to be compounded as soon as it's paid, but not before. Any other system would produce strange results when the gross rate was quoted as an AER.