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

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.

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.

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.

YES, I SEE WHERE WE HAVE THAT OPTION, I JUST DO NOT SEE AN ADVANTAGE EXCEPT AN ADVERTISING KUDO.

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.

Many banks use compound daily because that allows them to disclose the highest APY with any given base rate.

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.

Every negligible little piece is important to the big picture and staying above 20% ROE and to receive the maximum EOY bonus.

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.

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.

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.

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??

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.

This is not "fooling around with account specific disclosures." It is making them correct. Disclosures are not to match the general policy. MarB is correct. The disclosure must be specific to the account.

The compounding frequency remains at quarterly because of the statement "The APY assumes interest remains on deposit until maturity. A withdrawal will reduce your earnings."

The crediting frequency must be correct, in this case monthly. Crediting has nothing to do with APY calculations.

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.

A bank can use a preprinted disclosure as long as there are options on the disclosures, such as:
Interest will be credited [] quarterly [] monthly.

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.

I fully agree. Here is a perfect example of how reg DD was not completely good for the customer.

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.

OK, you introduced several new issues - not the original question.

First, Allan Dombrow, designed the APY calculator. I have spoke with him in person about this issue. He agrees that the calculator does NOT take into account crediting and that crediting can be more frequent than the compounding frequency.

Nobody said that this was a CD that required interest withdrawal. Mab posted:
If the customer requests a monthly check instead of quarterly compounding or a quarterly check I would disclose:

Required withdrawal are a different issue.

Second, you can put that in the APY program. The calculator doesn't even ask for crediting frequency (because it isn't in the APY formula!) unless you go into the required withdrawal portion.

I stand by the statement that crediting has nothing to do with APY calculations. Here is the APY formula:
FED-REGS, BANK-COMPLIANCE , 12 CFR Appendix A to Part 230--Annual Percentage Yield Calculation
APY = 100 [(1 + Interest/Principal) (365/Days in term) - 1]

Where is crediting in this formula? Be sure that you understand the difference between compounding. Compounding is when you add interest earned to the principal balance (this is in the APY formula). Crediting is when you make interest available for withdrawal.

That is why Reg DD requires you to say "the APY assumes interest remains on deposit until maturity. A withdrawal will reduce earnings." The APY assumes that the interest is not credited to the customer but compounded to the account.

You also said: "a person who could have interest monthly and keep it on deposit is going to have a higher APY regardless of compounding frequency." Compounding is what makes APY's higher (assuming the same interest rate). That is why you leave the compounding frequency at quarterly, instead of disclosing monthly compounding. Monthly compounding would falsely distort the APY.

Always leave the compounding the same - no matter if the customer is leaving the interest on the CD or taking it out. This way the APY doesn't have to be disclosed. This is why we must say "the APY assumes interest remains on deposit until maturity. A withdrawal will reduce earnings."

Always be specific on the crediting frequency. The disclosures are supposed to be accurate.

Whew! This is why I hate Reg DD.

Always remember that Truth in Savings is neither.

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.

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?

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.