How to work out interest rate return?

dllive

Hi,
This is going to be a stupidly easy question to answer:

If I have £100 in a bank account that is paying interest of 5%, how much am I earning in interest per month? Its not £5 is it? Maybe it would be £5 after 10 months?

[Deleted User]

Hi,

quick answer is £5 a year.

SalarySlave

You would get £5 interest after 1 year as long as the money was in there for the whole year.
£5 divided by 12 months is roughly 42p per month although this will vary as some months have more days that others

agrinnall

I can see how you might (mistakenly) think that it's £5 per month, you're not the first to ask that question and probably won't be the last, but I'm struggling to understand why you could think it would be £5 after 10 months.

CavendishWobble

Another common mistake is on regular savers where it is sometimes thought that you would get 5% on the final amount. When the interest is compounded so you would only get paid interest on the money you have in the account at the time each month.

YorkshireBoy

CavendishWobble wrote: »

Another common mistake is on regular savers where it is sometimes thought that you would get 5% on the final amount. When the interest is compounded so you would only get paid interest on the money you have in the account at the time each month.

Another common mistake is to say/guess/assume interest on regular savers is compounded monthly. It isn't.

Robisere

Somewhere on the T&C's it will tell you that interest is payable anually, and at what rate.

John-K_3

On my business, interest rate trading, the basis for interest is always explicitly defined.

In GBP interest rate swaps the amount that you get is...

Investment * interest rate * days / 365

And the frequency needs to be defined too. In GBP it is semiannually.

You then need to define how you count days. In GBP it is what you would expect, actual calendar days.

In other products you count each whole month as 30days, and divide the total by 360.

You then need to define what you do when the end date is on a weekend or holiday. Standard in GBP swaps is modified following. That means that you go to the next good business day, unless that takes you into a new month, in which case you roll back.

When I asked my mortgage provider, they were comp,Evelyn unable to tell me the basis that they calculated interest on.

[Deleted User]

You need to check your account terms, but compound interest is usually calculated daily and paid annually. So if you put £100 in, then after one day it will be multiplied by some factor F, and the balance will be.....

B = £100*F

then on the second day

B = £100*F*F = £100*F^2

and the third day

B = £100*F*F*F = £100*F^3 etc etc.....

until after 365 days it will be

B = £100*F^365

and if your annual interest is 5%, then

B = £105 = £100*F^365

so F^365 = 105/100 = 1.05

and F = 1.05^(1/365) = 1.000133681

So now if you want to know B(n), the balance after n days:

B(n) = £100*1.05^(n/365)

enthusiasticsaver

£100 would return £5 annually at 5% providing it stayed at £100 for the whole 365 days and interest is paid annually and not monthly.

dllive

Thanks so much all! (slightly embarrassed my maths is so bad).