We have CDs short term rate. The cusomters are getting their monthly interest mailed to them in a form of a check. Rate is 4.88% the APY 5.00% The branch is quoting the rate as 4.88% APY and the rate as 4.88% They said that they were told that if the person doesn’t leave the money in there and collects the interest monthly that you don’t have to state the APY as 5.00% because they are not earning 5.00%. I am confused on this issue. Any thoughts? Thanks

I am am sorry but its not clicking. I still don't see it. It si one of those days.

The APY must be based on the assumption that the money remains in the account.

Thant is what I thought..So they are doing it wrong.

I think this is only the case if the bank does not REQUIRE the interest to be paid out. If you are requiring they take their interest in the form of a check, then your branches are correct. If the customer's have made that choice on their own, then you are correct.

Ok that I understand..got it.
Thanks

I understand requiring the assumption that the interest stay on deposit but where does it tell us what compounding frequency to assume?

You have to use the actual compounding frequency that applies to the account.