Calculating interest

bolo

How do banks do it? Now i have to admit i am not bad with numbers ( i have 2 degrees in Maths!) , but i cannot get this numbers spot on. I will use the Lloyds tsb monthly saver account as an example, as this one should be one of the easier ones to work out.

I open the account with £500 (on the 5th) and then every month on the 18th pay in £250. It is the 8% (6.4 after tax) regular monthly saver account. Interest is paid annually but i am assuming it is calculated daily. Can anyone tell me how much interest i should get. on maturity? I know what lloyds have given me, but it is bugging me that i cannot work it out!!! Can anyone hazard a guess at the answer? Is interested compounded? How many days in a year? 365 or 360?

Sorry if i am being a bit anal about it all but i would just like to know!

Thanks

Lokolo

They calcualte daily from what it is your account (so any interest calculated but not yet in your account does not count).

Basically each month you will get an extra 4p daily (4.3 truncated, sometimes they round it, depends on bank) from the £250 added each month.

Add all this up, a huuuuge excel spreadsheet is usually best option. One sheet per month. Calcualte each month. Total it up and thats how it is.

I did this with Egg once and egg seemed to daily compound, I am waiting for my ISA interest to see how they do it in their ISA>

bolo

I have got it in a spreadsheet. Only 13 lines though. You don't have to break it down into days, months should be ok. I have got to within 19p, but that is using a "year" of 360. Is that common?

YorkshireBoy

Interest is calculated daily at the rate of...

Cleared balance x 8% / 365

At the end of the year (account opening anniversary) the 365 interest figures are summed up and then tax deducted.

( i have 2 degrees in Maths!)

How many days in a year? 365 or 360?

These two statements don't sit very well together do they?

YorkshireBoy

bolo wrote: »

Only 13 lines though. You don't have to break it down into days, months should be ok.

This is where you are going wrong.

Lokolo

Basically, if its not exact. you've got it wrong somewhere...

Are you truncating your pence? Or rounding them?

And you should use 365. I assume you chose 360 for bank holidays?

bolo

YorkshireBoy wrote: »

Interest is calculated daily at the rate of...

Cleared balance x 8% / 365

At the end of the year (account opening anniversary) the 365 interest figures are summed up and then tax deducted.These two statements don't sit very well together do they?

Cheeky!!! Some banks do seem to calculate based on a year of 360 days though! Can anyone confirm this?

bolo

I rounded down. But i compounded the interest. If i calculate using 365 days then lloyds have paid me more than expected. Maybe i should shut up!!!

bolo

YorkshireBoy wrote: »

This is where you are going wrong.

OK i will give it a spin using a daily calc.

Back in a tic...

bolo

Right calculating it daily, just based on cleared balances, based on a 365 day year tells me that lloyds have paid me £6.12 Too much!!!

Compounding the interest tells me that the bank have paid me £2.31 too much.

YorkshireBoy

Date.........open bal.......credit.........close bal........interest
5/5/07..........0.............500..............500..............(= 500 x 8% / 365)
6/5/07.........500..............................500..............(= 500 x 8% / 365)
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-
-
-
--
18/5/07.......500...........250...............750..............(= 750 x 8% / 365)
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-
-
-
18/6/07......750............250..............1000.............(=1000 x 8% / 365)
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-
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18/4/08......3500..........250...............3750............(=3750 x 8% / 365)
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4/5/08........3750..............................3750...........(=3750 x 8% / 365)
5/5/08...................................................Total =

Multply total by 0.8 to get the net interest.