Working out interest help.

lipidicman

grumbler wrote:

six-monthly (1+0.07/2)^2-1=0.0712
three-monthly (1+0.07/4)^4-1=0.0719
monthly (1+0.07/12)^12-1=0.0723
:mad:

The only thing that I can think of is the effect of the regular payments - there is something in the AER rules that if the regular deposits are part of the conditions of the account then they must be taken into the calculation - but i couldnt follow this bit!
http://www.bba.org.uk/bba/jsp/polopoly.jsp?d=135&a=1575

If deposits are made at more frequent intervals than whole years, the calculation can be made using monthly interest and the result expressed as an annual rate using the formula given at (d) below.

Since the interest is paid yearly the AER should equal the gross rate, so it has to be the regular payments

deefadog

Cheers grumbler, i'll stick with ING for now, until i find something else! Although transferes from ING take up to 3 days! so 36 days of the money in limbo!

Paul_Varjak

Tanks for the comments grumbler and deefadog. Also thanks for calculation of interest rate figures, grumbler.

Been going back to my schoolboy maths to try and find out how often interest would have to be paid in order for Halifax AER to be 7.07%.

However, I seem to end up with an expression which, I think, would have to undergo binomial expansion:

(1+(0.7)/x)^x

Where x represents the fraction of the year, when interest is paid. (looks like 7-8 months to me)

Can you help again grumbler?

lipidicman

Paul, that isnt it. Did you look at the BBA link?

In order to ensure consistency of calculation and fair comparison of products, the AER should be derived on the following basis:

A1 The only changes to the amount deposited to be taken into account are those that are required by the terms of the account. So, for example, on an account from which withdrawals may be made, the AER calculation is based on an initial deposit with no subsequent movements. On the other hand, on a monthly savings account, each monthly deposit is taken into the calculation. If certain deposits are required to qualify for a conditional bonus, then the AER including conditional bonus must be calculated assuming that the necessary deposits have been made
A2.........

Paul_Varjak

lipidicman wrote:

Paul, that isnt it. Did you look at the BBA link?

What is the BBA link?

grumbler

Paul_Varjak wrote:

...
(1+(0.7)/x)^x

Where x represents the fraction of the year, when interest is paid. (looks like 7-8 months to me)

Can you help again grumbler?

Actually for any x>5 result remains almost constant:
x
1__1.0700
2__1.0712
3__1.0716
4__1.0719
5__1.0720
6__1.0721
7__1.0721
8__1.0722
9__1.0722
10_1.0722
11_1.0723
12_1.0723

(1+1/x)^x works for e=2.71828... when x goes to infinity. ln(e)=1

(1+a/x)^x=[1+1/(x/a)]^(x/a)^a works for e^a when x goes to infinity. e^0.07=1.0725

I think lipidicman is right but unfortunately I don't have time at the moment to continue digging into all this... :mad:

P.S. bba link is in post #22

lipidicman

Yeah, you have to use the full AER equation and attempt to solve it iteratively (it is a sum of terms). The problem is 1:the equation is too small to read! and 2:it is made harder due to the fact you are using monthly deposits (so you have to reconvert to yearly).

I have to do some marking today, so I am not going to attempt it yet. I'll let you know if I get any joy from the maths!

deefadog

Thanks all, most of the last post went straight over my head, but at least i know now

lipidicman

Well you have got the rest of us in a tizz- I cant give up on a challenge..........

More fun than a sudoko - that's for sure, and educational!

deefadog

Looks like this could be a challenge It's way above my mathematical abilities i am afraid to say!

Once you solve this, which i am sure you will do you think you could put together a very,very,very simple faq that would explain to a complete money noob (me) what each interest equation means, for example:

Simplified explination of interest terms:

Net interest is the etc......
Gross interest is etc.....
AER interest is etc....

Which is right for you
Maybe an expliantion of TAX etc, and monthly or yearly regular savings etc

How to work out each one

Net to gross
gross to net
etc
etc


I know this is in the FAQ's but it's too long winded and confusing