Answer:
Answer by David Dickinson: This is one of the biggest misunderstandings of Reg DD. Read your TISA disclosure carefully. It should say something like "The APY assumes interest remains on deposit until maturity." In other words, crediting doesn't matter for calculating APY's. You assume that the interest does compound.
Answer:
Answer by Richard Insley: As David indicates, Truth in Savings is not the truth. APY calculations and disclosures do not reflect the amounts and timing of actual cash flows between the depositor and bank.
Answer:
Answer by John Burnett: We should point out, however, that if the bank requires that interest be paid out rather than compounded, the APY will be calculated based on no compounding, and it will be equal to the interest rate in most cases.
So, if the bank offers, for example, an income CD that includes as a product feature monthly interest transfers to customers' other accounts, it will advertise and disclose an APY based on no compounding (equal to the interest rate). But if there is an option afforded the customer as to compounding, compounding must be assumed both in ads and in disclosures, regardless of whether it's elected by the consumer.
Source: Footnote 3, Appendix A, Regulation DD.
First published on BankersOnline.com 06/7/04
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