Interest Calculation

buffman

If I have £1000 in a fixed rate bond with AER 3% net paid quarterly over 2 years, what will my balance be at the end of the 2 years?

Is the calcuation simply (£1000 x 1.03) x 1.03 = £1060.90 or does the paid quartley alter the calculation?

enjoyyourshoes

Try www.investopedia.com/terms/a/aer.asp

LittleVoice

If you want to work it out to the penny then I think you need to know the gross rate and work it out quarterly, remembering that interest is normally paid on whole pounds whereas the AER doesn't take account of, for instance, not receiving interest on 98p.

ctdctd

LittleVoice wrote: »

If you want to work it out to the penny then I think you need to know the gross rate and work it out quarterly, remembering that interest is normally paid on whole pounds whereas the AER doesn't take account of, for instance, not receiving interest on 98p.

I think not, interest is paid on the balance including the pennies.

Every little helps

antrobus

buffman wrote: »

If I have £1000 in a fixed rate bond with AER 3% net paid quarterly over 2 years, what will my balance be at the end of the 2 years?

Is the calcuation simply (£1000 x 1.03) x 1.03 = £1060.90 or does the paid quartley alter the calculation?

No, because AER = annual equivalent rate, so the quarterly compounding will already have been taken into account when quoting that 3% net rate.

Your calculation should do.:)

LittleVoice

ctdctd wrote: »

I think not, interest is paid on the balance including the pennies.

Every little helps

Depends, perhaps, on the institution.


For example, Nationwide BS pays on whole pounds only.

Archi_Bald

LittleVoice wrote: »

Depends, perhaps, on the institution.


For example, Nationwide BS pays on whole pounds only.

I have several interest paying Nationwide accounts, and had some additional ones with them in the past. Each and every one pays/paid interest calculated on the exact balance at the end of each day.

I have never seen any terms and conditions, from Nationwide or any other BS/bank, stating that interest only get paid on whole pounds. Perhaps I haven't looked hard enough and you can point me at some examples?

psychic_teabag

If you pay tax on the interest, that will have an effect. The AER is presumably assuming no tax deducted, but because tax is deducted from each quarterly credit, the compounding will suffer slightly. So you get slightly less than just knocking 20% off the total interest calculated above. But only a few pennies I think.

LittleVoice

Archi_Bald wrote: »

I have several interest paying Nationwide accounts, and had some additional ones with them in the past. Each and every one pays/paid interest calculated on the exact balance at the end of each day.

I have never seen any terms and conditions, from Nationwide or any other BS/bank, stating that interest only get paid on whole pounds. Perhaps I haven't looked hard enough and you can point me at some examples?

Point 8 of http://www.nationwide.co.uk/~/media/MainSite/documents/products/savings/terms-and-conditions/P2766.pdf
"We will calculate interest on each whole pound in the account."


That was simply the first in a list of their savings account - Instant Access Saver. You will find, I expect, that it applies to all their accounts but do say if you find one which is different.

bsms1147

LittleVoice wrote: »

Point 8 of http://www.nationwide.co.uk/~/media/MainSite/documents/products/savings/terms-and-conditions/P2766.pdf
"We will calculate interest on each whole pound in the account."


That was simply the first in a list of their savings account - Instant Access Saver. You will find, I expect, that it applies to all their accounts but do say if you find one which is different.

Interesting.

However

LittleVoice wrote:

interest is normally paid on whole pounds

Paying interest on the exact balance is by far the more 'normal'.

LittleVoice

bsms1147 wrote: »

Interesting.

However

Paying interest on the exact balance is by far the more 'normal'.

I have seen some bodies saying they pay on entire balance but others, at first sight, seem silent and do not specify whether "entire balance" or "whole pounds".


We know there isn't much difference in the amounts involved (especially with generally low interest rates as they are now).