NS&I rates

almac162

Hi! I am looking at two products shown on here provided by NS&I. A Growth Bond ( 6.2% AER) and an Income bond (6.03 gross/6.2% AER). Thing is the Income Bond  pays interest away - why are they quoting an AER rate for this product? I have queried them directly today and their response confirms to me that the 6.2% is purely notional - but they don’t agree. What am I missing? They confirm it pays 6.03% but in same breath are trying to tell me it’s equivalent to 6.2% - how is this possible?! 

ColdIron

almac162 said:

Hi! I am looking at two products shown on here provided by NS&I. A Growth Bond ( 6.2% AER) and an Income bond (6.03 gross/6.2% AER). Thing is the Income Bond  pays interest away - why are they quoting an AER rate for this product?

Because they are required to quote AER

What am I missing? They confirm it pays 6.03% but in same breath are trying to tell me it’s equivalent to 6.2% - how is this possible?!

You are missing the above. 6.20% AER is equivalent to 6.03% gross, i.e. the rate you would receive if it were to compound at 6.03%

refluxer

No - you're not missing anything, at least not in the sense that you've spotted that you can't actually achieve 6.20% with this account.

They're forced to use AER (by convention) so that you can compare it with other accounts but in this case, as there isn't actually an option to have the interest paid into the account, then it's a bit misleading (to the layman at least), IMO.

Malthusian

Thing is the Income Bond  pays interest away - why are they quoting an AER rate for this product?

Because 1/12th of 6.2% next month, 1/12th of 6.2% the month after that, etc etc is better than 6.2% after a year. You only have to wait an average of about six months for your interest instead of a year.

Hence the headline rate for the monthly income bond needs to be slightly lower to take this into account.

If you get paid 1/12th of 6.03% every month, and each month you reinvest the interest received at 6.03%pa, at the end of the year you will have a 6.2% return.

In numbers: 1/12th of 6.03% is 0.5025%. 1.005025^12 - 1 = 6.2%.

ColdIron

Well you could open up another GIB and pay the interest into that, and then when that pays interest open up another GIB and pay the interest into that, and then when that ....

Malthusian

refluxer said:

They're forced to use AER (by convention) so that you can compare it with other accounts but in this case, as there isn't actually an option to have the interest paid into the account, then it's a bit misleading (to the layman at least), IMO.

It's not misleading. ColdIron beat me to it - there's nothing stopping you reinvesting the interest at the same rate for as long as the account is available.
It may be a bit impractical, but the fundamental reason for assuming interest is reinvested at the same rate is that they have to assume something.
Having interest in your hands after 1 month instead of 12 has a value, and the only figure available for that value that makes any sense is the one provided by the account itself.

westv

A difference of 0.17%!
Not that long ago people would have been fighting over accounts paying that rate in total.