Answer:
Although on the surface, it appears compounding and crediting are always correlated, they aren't when a depositor is allowed to withdraw interest. Why? Because TISA requires this statement: "The APY assumes interest remains on deposit until maturity. A withdrawal will reduce your earnings." And TISA requires the disclosure of compounding and crediting in ALL cases.
Let me explain:
If you have a compounding frequency that occurs during the term of the CD and it is credited to the CD, then we all understand how the interest is added to the balance and the APY increases above the interest rate.
Common sense tells us that if someone withdraws the interest from the CD that the interest is never really compounded and the APY should be the same as the interest rate. BUT WAIT! The required statement in TISA trumps this logic.
Even when interest is withdrawn out of the CD, you must still disclose the compounding frequency. For instance, if the interest accrued is deposited to their checking account monthly, then the crediting frequency would be monthly. But what about the compounding frequency. There's nothing to be compounded because the interest has been swept out. But when we remember the required TISA statement, and ASSUME interest remains on deposit until maturity, we have to act like it did for the frequency of compounding. Therefore, the compounding frequency would still compound monthly (in your example).
My suggestion:
- Always disclose the compounding frequency as the bank's policy for this product. What would it be if the interest stayed on?
- Always disclose the crediting frequency as what is really happening—specific to the customer and their account (monthly in this case).
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