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#17552 - 05/13/02 05:23 PM
TISA: CD Daily Compound
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Anonymous
Unregistered
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We have one CD that will be compounding daily and a check
paid monthly.
Do we show " We will compound daily and pay monthly by check"
or "We will compound monthly and pay monthly by check"
Thanks
Last edited by mbguard; 01/24/03 06:21 PM.
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#17553 - 05/14/02 01:32 PM
Re: CD Daily Compound
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Anonymous
Unregistered
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You should show "We will compound daily and pay monthly by check" since that is what you are actually doing. The disclosures should match your actual practice.
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#17554 - 05/14/02 01:37 PM
Re: CD Daily Compound
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100 Club
Joined: Apr 2001
Posts: 194
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What kind of a computer program do you have that compounds daily and then pays monthly? We accrue daily and pay monthly, quarterly, semi-annual etc.
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#17555 - 05/14/02 01:57 PM
Re: CD Daily Compound
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Power Poster
Joined: Sep 2001
Posts: 6,029
Sweet Home AL
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Jack Henry allows you the option of compounding interest daily or using simple interest. You then determine the frequency interest will be paid to the customer by adding back to the CD, check, deposit to another account with your bank or by ACH.
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#17556 - 05/14/02 02:02 PM
Re: CD Daily Compound
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100 Club
Joined: Apr 2001
Posts: 194
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YES, I SEE WHERE WE HAVE THAT OPTION, I JUST DO NOT SEE AN ADVANTAGE EXCEPT AN ADVERTISING KUDO.
Last edited by wpdcad; 05/14/02 02:02 PM.
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#17557 - 05/14/02 02:17 PM
Re: CD Daily Compound
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Power Poster
Joined: Sep 2001
Posts: 6,029
Sweet Home AL
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You earn more when your interest earns interest every day. Most of us use simple interest as a tool to control interest expenses; however, I do still run into banks which compound daily on many of their interest-bearing accounts.
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Life without Jesus is like an unsharpened pencil - it has no point.
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#17558 - 05/14/02 04:30 PM
Re: CD Daily Compound
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Gold Star
Joined: Nov 2000
Posts: 489
KY
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Many banks use compound daily because that allows them to disclose the highest APY with any given base rate.
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Opinion expressed are my own and not necessarily those of my employer.
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#17559 - 05/14/02 04:41 PM
Re: CD Daily Compound
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10K Club
Joined: Aug 2001
Posts: 21,939
Next to Harvey
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As the calculations are always based on a 365 day period, only two things affect the APY: the interest rate and the frequency of compounding. Obviously, if the customer is withdrawing the interest, the net effect on the bank's interest expense is negligible.
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#17560 - 05/14/02 07:53 PM
Re: CD Daily Compound
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100 Club
Joined: Apr 2001
Posts: 194
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Every negligible little piece is important to the big picture and staying above 20% ROE and to receive the maximum EOY bonus.
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#17561 - 05/16/02 09:17 PM
Re: CD Daily Compound
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10K Club
Joined: Oct 2000
Posts: 10,200
Toano, VA
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Steve- Daily compounding doesn't give the highest APY, continuous compounding does. At low rates like we have now, you don't see the difference, but it shows up at higher levels and always produces a bit more interest than daily.
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#17562 - 05/17/02 08:25 PM
Re: CD Daily Compound
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Gold Star
Joined: Nov 2000
Posts: 489
KY
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Richard, I knew that, and our systems do support continuous compounding. (Some things just border on the ridiculous.) And, yes, it does make a difference if you have high dollar accounts. I almost put continuous in my earlier response, but I was afraid I would create a problem for some one who hadn't already heard of it.
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Opinion expressed are my own and not necessarily those of my employer.
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#17563 - 05/17/02 11:54 PM
Re: CD Daily Compound
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10K Club
Joined: Oct 2000
Posts: 10,200
Toano, VA
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Had it not been for Reg Q in its final years, I doubt anyone would have ever heard of it. In those days of rate ceilings we used continuous compounding so we could make the claim that we were paying the absolute highest amount allowed by law.
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#17564 - 10/12/02 02:32 AM
Re: CD Daily Compound
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Anonymous
Unregistered
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If a CD normally compounds interest quarterly and credits interest quarterly I was taught to disclose the following on the TIS disclosure: Compounded quarterly Credited quarterly
If the customer requests a monthly check instead of quarterly compounding or a quarterly check I would disclose: Compounded Quarterly (Because this is the normal policy and what your apy is based on) Credited Monthly (this is specific to the account)
Have you understood it the say way??
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#17565 - 10/14/02 01:25 PM
Re: CD Daily Compound
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Anonymous
Unregistered
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Instead of fooling around with account-specific disclosures, I would continue to disclose quarterly compounding and quarterly crediting, since that is your general policy. The TIS disclosures should also be disclosing that the APY assumes interest remains on deposit until maturity and that a withdrawal of interest will reduce earnings, which covers those situations in which the customer requests a monthly check instead of quarterly crediting.
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#17567 - 10/14/02 05:58 PM
Re: CD Daily Compound
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Anonymous
Unregistered
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Upon further reflection, and since the commentary has nothing to add, I have concluded that David makes a valid point. It seems to me, though, that a bank is then precluded from using preprinted disclosures, because if a bank has a CD product that gets compounded and credited quarterly, and one customer out of a hundred asks for a monthly interest check instead, the bank would have to create a new disclosure just for that customer. Doesn't seem right.
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#17569 - 10/15/02 02:02 AM
Re: CD Daily Compound
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Anonymous
Unregistered
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Thanks for the reply guys. It just seems confusing to say that interest will be compounded quarterly and the interest will be credited monthly by check. Sounds like it would be confusing to the customer.
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#17571 - 10/15/02 07:21 PM
Re: CD Daily Compound
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Gold Star
Joined: Nov 2000
Posts: 489
KY
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Try to put that one in the APYWIN program. You can't do it. If the compound frequency is quarterly, you can't have crediting any more often than the number of quarterly periods in the given term. i.e. a twelve month CD can only have 4 crediting opportunities when compounding quarterly.
I respectfully disagree with your statement that 'crediting frequency has nothing to do with the APY.' I believe that it has a lot to do with the APY.
In the scenario described, it believe you have a situation where 'interest withdrawal is required.' If you agree to get interest quarterly you can have a check or keep the interest on deposit. The APY is the same in both cases.
However if you can only get a credit by check monthly -- you cannot have interest remain on deposit if interest is paid monthly -- then under that option the interest withdrawal is required. That should also have an effect on the APY because a person who could have interest monthly and keep it on deposit is going to have a higher APY regardless of compounding frequency.
Last edited by Steve Shoulta; 10/15/02 07:26 PM.
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Opinion expressed are my own and not necessarily those of my employer.
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#17573 - 10/15/02 09:16 PM
Re: CD Daily Compound
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10K Club
Joined: Oct 2000
Posts: 10,200
Toano, VA
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Always remember that Truth in Savings is neither.
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#17574 - 10/15/02 09:29 PM
Re: CD Daily Compound
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10K Club
Joined: Oct 2000
Posts: 27,763
On the Net
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I agree with David and want to emphasize his point that compounding and crediting are different and are key.
Also, be clear on whether you are discussing the APY or a calculation of the APYE. The actual APY earned is influenced on whether or not the funds are credited back because that obviously increases the balance that is earning interest, and that increases the interest earned. A longer statement period with frequent credit periods should emphasize this.
But it doesn't effect the disclosed APY at account opening.
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#17575 - 10/16/02 12:41 PM
Re: CD Daily Compound
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Anonymous
Unregistered
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Let me see if I have this straight. If I offer a 24 month cd with quarterly compounding but the customer requests a monthly check instead of leaving it in the account then the TISA disclosure would say compounding frequency-quarterly and crediting frequency-monthly? If CD normally compounds annually then compounding frequency-annually and crediting frequency-monthly?
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#17576 - 10/16/02 04:42 PM
Re: CD Daily Compound
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Gold Star
Joined: Nov 2000
Posts: 489
KY
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David, I agree that the crediting doesn't appear in the formula, but you hit the nail on the head when you use the terms 'crediting' and 'compounding' interchangeably and they really aren't.
Many banks disclose 'compounded quarterly' as a yield adjustment only. A bank that uses a 'compound quarterly' rate will earn as if the interest is credited back to the account, but it really isn't. A 12 month CD that credits only at maturity will earn more with a compound quarterly yield adjustment than one that doesn't.
I know it is not common, but it is possible.
Likewise most banks that offer a monthly check or monthly 'keep on deposit' don't disclose this as 'monthly compounding' yet that is the result and a customer that keeps the funds on deposit will earn more even though both accounts have the same APY.
So the 'difference' is in semantics and how you calculated the 'interest' in the APY formula.
_________________________
Opinion expressed are my own and not necessarily those of my employer.
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