We have a 7 month CD that compounds interest only at maturity. The customer can elect to receive their interest sooner if they would like but it will not compound that interest back to the CD, say they want a monthly check of their interest. When disclosing the APY on the CD at account opening, I was taught that the APY would remain the same if they just wanted the interest out because it was not compounding back to the CD. Our Core System Provider is putting a higher APY on the CD disclosure when we state that the customer wants a monthly check of interest. When they were asked, they said that even though it is not compounding the interest back to the CD, it essentially is considered that it is so the APY would be higher in this case.

Is this correct? If so, where can I find some supporting information on this. I have found lots of information on compounding monthly & etc. but not specifically on that even though a customer pullls the interest out, it is still considered compounding.

Any help would be appreciated.

It a pretty simple formula. Whether or not there is compounding or the interest is paid out on a periodic basis does not impact the calculation. See Appendix A. It is based on the interest paid and the CD amount.

2) If an institution pays $30.37 in interest on a $1,000 six- month certificate of deposit (where the six-month period used by the institution contains 182 days), using the general formula above, the annual percentage yield is 6.18%:

APY = 100 [(1 + 30.37/1,000) (365/182) - 1]

APY = 6.18%

I thought it was too but the Core Provider is stating otherwise. I want to get my hands on their formula....

It's in the instructions for the calculation in Appendix A:

"In determining the total interest figure to be used in the formula, institutions shall assume that all principal and interest remain on deposit for the entire term and that no other transactions (deposits or withdrawals) occur during the term. This assumption shall not be used if an institution requires, as a condition of the account, that consumers withdraw interest during the term."

To determine the amount of interest that goes into the calculation, the core assumes that the interest is remaining in the account and compounding, not being withdrawn. The only time you don't do that is if the bank REQUIRES withdrawal of interest each month.

That's also the reason for the statement in the disclosures that the APY assumes that interest remains in the account until maturity.

But she said that on this CD there is no compounding, so what difference does it make if interest is periodically withdrawn?

Good point - I misread her post to say that it wasn't compounding only because the interest was being withdrawn. It sounds like the core processor has an incorrect setting for the account, treating it as compounding monthly.

Apparently I need more coffee.

Thank you, now to tell the core processor they are wrong...that will be fun.

I would be willing to bet it's an easy fix - some sort of policy setting for this account type within the core that can be changed from one code to another.

Appreciate all of the information both of you have given me.