Answer:
Answer by Richard Insley:
The term "compounding" is not defined in Reg DD, so you're free to use it any way you want. Standard useage, however, would be to limit the term to those cases where interest is capitalized to principal periodically and then becomes interestbearing. If the interest is not added to the interestbearing balance until the account matures, then interestoninterest is not possible and you would not have "compounding." Just because the depositor may choose to reinvest the balance, I would not consider "interest at maturity" to be compounding.
Answer:
Answer by John Burnett:
I agree that use of the term "compound" for a simpleinterest CD is likely confusing. However, regardless of what the customer might do with interest at the 10month maturity, the calculation of the APY must assume that principal and interest remain on deposit for one year. So the APY will reflect the capitalization of interest at the ten month maturity, and will be greater than the interest rate, except for very small interest rate values.
First published on BankersOnline.com 7/1/02
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