I am having a brain lapse.. I believe banks must pay interest at least every twelve months (i.e. you cannot have a two year CD with interest paid all at maturity),, Is this an IRS rule or FDIC rule or both? Directions to the cite would be most appreciated... please help! Thx.

You can pay interest only at maturity, however that will trigger IRS 1099OID reporting for each year and the customer will have to pay taxes on the earnings without actually getting the money.

What you may be thinking of is the problem with the APY calculation if you pay simple interest and only at maturity and the term is over one year. If you require the customer to take interest at least annually, you can use the interest rate as the APY. But if you don't, the APY will be lower than the interest rate.

At the risk of asking a question that is too simple, would you please explain "simple interest?"

I always thought that if my CD was for a term between 1 and 2 years and the bank paid interest annually then, depending on the interest rate, the APY would be higher than the interest rate. Does it have something to do with compounding?