Is there an actual definition of "compounding" in any of the regulations?

Our processor changed our CD maturity notices to read "Interest is paid quarterly by adding to this account and is not compounded."

They say is was changed to read this way because we calculate on a simple interest basis.

I thought that if accrued interest was paid by adding it to the principal balance that this was compounding. Am I missing something?

Interest could compound without being paid. Used to be more common, but you don't see that promoted as much anymore.

True, I hadn't thought about that because we've never computed interest that way since I've been here.

But isn't crediting interest quarterly to the CD balance considered compounding?

Well, when I refer to compounding, I am referring specifically to the ability to earn interest on accrued, but unpaid, interest.

Not if you continue to base your interest accrual on the orginal deposit amount, and do not include the credited interest portion into your calculation.

Simple interest has no compounding...it sounds like your system is crediting the account with the accrued interest, perhaps for the benefit of the customer, but if the interest continues to accure on the original deposit only, then you have no compounding.

Here's a definition from a dictionary of finance and investment terms:

Compound interest - interest earned on principal plus interest that was earned earlier. If $100 is deposited into the Bank at 10% the depositor will be credited with $110 at the end of the first year and $121 at the end of the second year. The extra $1 which was earned on the $10 interest from the first year is the compounded interest.

Thank you all for you help!

When we pay interest quarterly, it gets added to the original principal, so future interest is calculated on the original principal plus the interest that has been credited and so on and so forth...

Then I would say that interest is paid and compounded quarterly. Your APR should be about 10bp above your nominal rate, if you're in the 5% range.

BTW: I have been in contact with someone from our processor and it was a gliche on the notice, they are in the process of fixing it!

Thanks again for your help!