We are planning a CORE conversion and we will need to change the frequency on which we pay CD interest. Currently, we compound monthly and pay quarterly. The new CORE system will only pay monthly if the interest compounds monthly. So we will need to change our current CD accounts (that compound monthly) from paying interest quarterly to paying monthly. Will we will be sending out letters to these customers, will we need to provide new APY Disclosures?

Someone correct me if I'm wrong here, but I don't think you can change a CD like this mid-term. Now, to be fair, in your example, it's working in the customer's favor because they're getting their money sooner. But a CD isn't like a checking account which can have terms change anytime; it's a contract you've both (bank and customer) agreed to.

Think about it from the opposite perspective - if you currently compounded monthly and paid monthly, but the new core only allowed for you to pay quarterly. You couldn't just go change all of those CDs without the customers agreeing to it.

The letter we are compiling will give them the option to leave the monthly interest with the CD or have it deposited into a checking account or by a check mailed to them. My concern is where the customer wants to take the monthly interest from the CD because now it would be simple and the APY would now be different.

If we cannot make this change mid-term, how do we handle these accounts after CORE conversion?

dkm: I'm not answering your question (just yet), but let me ask a question. You said "Currently, we compound monthly and pay quarterly. The new CORE system will only pay monthly if the interest compounds monthly.. You say you pay interest quarterly, so where is the compounding monthly interest going?

Compounding occurs when the interest earned on an account begins to earn interest itself. The frequency of compounding is the frequency in which interest that has been earned is added to the balance of the account (principal). Whether the earned interest is or is not available for withdrawal is of no consequence to the compounding frequency.

I agree with your new CORE system. If you are compounding monthly, there should be interest to pay out monthly. You don't have to pay it out (it is assumed that it is added to the principal balance), but you could.

MScarn: You're right. They have a contract that should be followed until the CD matures. You also say "in your example, it's working in the customer's favor because they're getting their money sooner. That's not really true as the CD has compounding monthly. The more frequent the compounding, the higher the APY. If they withdraw the money (get it sooner), the true return is reduced as it isn't being added to the principal. Thus the true APY is never achieved because the principal balance stays the same. If that doesn't make sense, I can provide a mathematical example.

Daily compounding does not pay interest daily. It is a yield adjustment to the interest rate.

David - you're right, I misread/overthought the original post. Thanks for clarifying!

StevenD: "Daily compounding does not pay interest daily. It is a yield adjustment to the interest rate."
I'm not following you.

When you calculate interest for a daily compounding account you do so by having a higher interest rate on the account. The system does not physically pay interest each day into a new balance on which to calculate the interest for the next day.

Steven: If you are compounding interest, that means you ARE paying interest to the principal balance. I stated this in my first post, but I'll say it again:
Compounding occurs when the interest earned on an account begins to earn interest itself. The frequency of compounding is the frequency in which interest that has been earned is added to the balance of the account (principal). Whether the earned interest is or is not available for withdrawal is of no consequence to the compounding frequency.

We're off track from what the OP asked, but I fail to understand your explanation and yet you call it compounding.

Although the compounding is done daily (or even "continuously"), it may not show up on the account balance or statement until it's actually credited to the account. Daily compounding is done in many systems by adding the calculated interest each day to an interest buffer, and calculating interest each day on the sum of the account balance and the interest buffer. Then, at cycle time, the buffer is added to the balance to start the next cycle with an empty buffer.

It's still compounding because interest is being calculated on interest.

That makes sense John. Thanks.