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APY Calculation Question
by John Burnett, BOL Guru
Guru BIOS
Question: Assume the following: Customer has a CD for $95,000, term 9 months, rate 7%, simple interest rate and no compounding. (This is at the option of the customer.) Interest is paid monthly. For Truth in Savings disclosure purposes, are the rate and APY the same?
Second example: the same terms except that this is a ONE-month CD. For a one-month CD, are the rate and APY the same?
Answer: No on both counts.
The APY calculation assumes the deposit remains with the bank for one year, regardless of the term. It therefore assumes that the nine-month CD and the one-month CD will be renewed with interest rolled in at each maturity until we reach the one-year point.
The ONLY CD account that has an APY that's exactly the same as its interest rate is an account that is for one year or more, and from which the bank REQUIRES the withdrawal of all interest at least once annually.
First published on BankersOnline.com 5/16/05
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