How to work out interest rate return?

[Deleted User]

The other thing to check is whether the interest is simple or compound. The vast majority of accounts are compound, but some are simple, in which case the daily interest is just £5/365 (and £5/12 monthly).

enthusiasticsaver wrote: »

£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.

The times when you're likely to want to know interest earned over an arbitrary period is when you're closing an account, or if interest is paid annually but not on the anniversary of the account opening, or if you want to know the interest over a year when the balance has changed substantially.

eskbanker

enthusiasticsaver wrote: »

£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.

If the 5% is the AER figure (as headline interest rates typically are) then it doesn't matter if the interest is paid annually or monthly as the gross rate for the latter would be adjusted accordingly to deliver the 5% over the full year.

Anthorn

eskbanker wrote: »

If the 5% is the AER figure (as headline interest rates typically are) then it doesn't matter if the interest is paid annually or monthly as the gross rate for the latter would be adjusted accordingly to deliver the 5% over the full year.

F.Y.I.
You've applied two different terms in relation to the same product, A.E.R. and Gross which are not the same. Basically A.E.R. takes into account compound interest where interest is added for example monthly or daily and Gross rate doesn't take into account compound interest and assumes annual interest Typically where interest is annual both A.E.R. and Gross are the same but where interest is added and compounded for example monthly or daily A.E.R. is higher than Gross.

eskbanker

Anthorn wrote: »

F.Y.I.
You've applied two different terms in relation to the same product, A.E.R. and Gross which are not the same. Basically A.E.R. takes into account compound interest where interest is added for example monthly or daily and Gross rate doesn't take into account compound interest and assumes annual interest Typically where interest is annual both A.E.R. and Gross are the same but where interest is added and compounded for example monthly or daily A.E.R. is higher than Gross.

For once I agree with most of what you've posted but that's because you've just paraphrased what I posted!

Most accounts quote interest in AER terms in order to support standardised comparisons between products but, as I said before, the gross rate is adjusted for monthly paying accounts (to account for compounding), so a gross rate of 4.89% is used for a 5% AER account where interest is paid monthly and therefore compounded.

So yes, gross and AER are indeed different for monthly interest but that's what I was saying all along!

Anthorn

eskbanker wrote: »

For once I agree with most of what you've posted but that's because you've just paraphrased what I posted!

Most accounts quote interest in AER terms in order to support standardised comparisons between products but, as I said before, the gross rate is adjusted for monthly paying accounts (to account for compounding), so a gross rate of 4.89% is used for a 5% AER account where interest is paid monthly and therefore compounded.

So yes, gross and AER are indeed different for monthly interest but that's what I was saying all along!

I didn't paraphrase at all. I pointed out your error in equating A.E.R. and gross which are not the same. Here's the post that I was commenting on:

eskbanker wrote: »

If the 5% is the AER figure (as headline interest rates typically are) then it doesn't matter if the interest is paid annually or monthly as the gross rate for the latter would be adjusted accordingly to deliver the 5% over the full year.

Banks do in fact quote the same interest rate for both gross and A.E.R. for example Lloyds Bank savings accounts, but that is primarily to distinguish gross interest from net interest juxtaposing gross over A.E.R. but is not equating gross and A.E.R.

It's as well to be accurate because some people may mistakenly equate A.E.R. with Gross.

eskbanker

Anthorn wrote: »

It's as well to be accurate because some people may mistakenly equate A.E.R. with Gross.

Indeed, we do agree on that but I'm not one of those people and struggle to understand where in my post you thought I was when I was quite clearly explaining about how and why they're different....

Anthorn

eskbanker wrote: »

Indeed, we do agree on that but I'm not one of those people and struggle to understand where in my post you thought I was when I was quite clearly explaining about how and why they're different....

No. You are still confused.
Compare "1.50%
Tax free / AER" with "0.35%
gross / AER" and "0.35%
Tax free / AER" with "2.50%
gross / AER"
Here "gross" refers to the tax position and is not a compounded interest rate. A.E.R. provides the compounded interest rate.
https://www.lloydsbank.com/savings.asp

I think you should actually learn about the subject before you comment further !

nic_c

You will often see both rates advertise, since they have to give AER so you can compare products. Many banks have savings calculators on there, e.g. saving £100 per month at 5% AER to see what you will end up with at the end

eskbanker

Anthorn wrote: »

No. You are still confused.
Compare "1.50%
Tax free / AER" with "0.35%
gross / AER" and "0.35%
Tax free / AER" with "2.50%
gross / AER"
Here "gross" refers to the tax position and is not a compounded interest rate. A.E.R. provides the compounded interest rate.
https://www.lloydsbank.com/savings.asp

I think you should actually learn about the subject before you comment further !

Not for the first time, you've gone off at a tangent here!

The issue I was highlighting is the distinction between gross and AER when comparing monthly and annual interest.

The distinction between gross and net (if/when tax comes into play) is a separate issue unconnected to this thread, but since all savings accounts have paid interest gross since April 2016 this is somewhat moot.

I'm not sure where you're going with all this or why, but since there is no dispute that in order to achieve a 5% AER, the gross rate is also 5% if interest is paid annually but reduced to 4.89% if paid monthly (the point I originally made which I don't believe you're trying to challenge), I can't see any value in disappearing off down irrelevant cul de sacs about gross v net....

mgdavid

esky,
Anthorn is on my Ignore list - and I've just been reminded why!