FYI, I hear the APY program just went under a major overhaul by the regulators. It is being released to examiners this month and hopefully it will be available to us, "within a reasonable amount of time".

I don't know if options discussed above will be included or not.

BrooksB: Yes to all you said.

Steve: I don't agree, but I can't make my case any clearer than the (long) post I already gave. I do want to comment I didn't (& you can't) use the terms "crediting" and "compounding" interchangeably. I tried to explain that there is a big difference between the two (I noticed that I left out a few words in my post).

I'll add two cents here: The regulation requires, when stating how interest shall be calculated for input to the APY formula, that, "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."

Footnote 3 to Appendix A says: "This assumption shall not be used if an institution requires, as a condition of the account, that consumers withdraw interest during the term. In such a case, the interest (and annual percentage yield calculation) shall reflect that requirement."

I read these requirements to mean that, if the bank has a product that compounds and pays under certain rules, the APY to be disclosed must reflect those rules, regardless of the fact that the consumer has obtained an exception by asking that interest be paid out periodically during the term of the deposit. Only if the bank requires the payout does the APY reflect the payout.

I agree that the compounding and crediting frequency must reflect the actual (as contrasted with the "as designed") way the specific account works.

The apparent conflict between the disclosure of the actual compounding and crediting frequency and the "as designed" APY is reconciled by the required disclosure that the APY assumes that interest stays with the account.

I know I should know this, but what's the difference between daily compounding and continuous compounding?

Daily compounding uses 1/365 of the interest rate on each day, adding the result to the principal and doing it all over again.

Continuous compounding splits the day up into theoretically an infinite number of pieces, and then calculates the interest for each little piece, compounding each time.

You know from experience that daily compounding gives you a higher APY than monthly compounding (although it doesn't make a big difference at today's interest rates). Imagine compounding each hour, or each minute, or each second (that's 86,400 times as often as daily compounding), and so on.

No one really cares now that there are no longer any caps on interest rates. But back prior to March 1986 when certain rates were capped, some banks wanted to be able to say they paid absolutely the most interest allowed by law, and the concept of continuous compounding was introduced and touted.

Hi. I know this is an old post (very old) but I am fairly new to compliance and having a hard time understanding the way the system calculates interest (on ledger balance, 365 days, simple method) and APY on ledger balance. So the disclosure currently says "interest will be compounded every quarter". It further says, "we use the daily balance method to calculate the interest on your account. this method applies a daily periodic rate to the principal in the account each day."

When having to review Reg DD and you know your system is set up with the aforementioned parameters, how do you test and monitor to see if the interest is actually paid out correctly in terms of the method applied to calculate the interest? Some says the wording under "compounding and crediting" refers to the method used and some says the wording under "balance computation method" refers to the method that are used to calculate the interest.

How is it possible that your system says you are applying the Simple method but your disclosures and periodic statements seems to reflect compounding is being applied?

Please help me understand this in easy terms as I am so confused from research and what the opinions of others is.

It just doesn't make any logic sense to me anymore.

They are two different things. You use the principal balance on a daily basis to calculate the interest for that day. That daily interest is placed in an interest accrual account until the end of the quarter. At the end of the quarter, the amount in the interest accrual account is transferred to the principal balance and you start the process again.

What Randy said. Without getting technical and saying it a different way, the bank figures out each day how much interest the customer will get each day, and gives it to them on a quarterly basis.

You could test it by getting the ending (or collected balance in the account - whatever your agreement calls for) and multiplying it by the rate the customer will be paid divided by 365 (or 366) every day. You add up each of those for the quarter and compare the total to what was deposited into the account.