How do banks calculate interest on term deposits, what is the formula for this?
What I thought was the calculation didn't seem to equal what the bank calculator on website said so want to know how to calculate it myself.
Thank you
How do banks calculate interest on term deposits, what is the formula for this?
What I thought was the calculation didn't seem to equal what the bank calculator on website said so want to know how to calculate it myself.
Thank you
Like everything else, the term deposit rates are determined by supply and demand.
If a Bank has a particular investment project, for which $xxx is needed short-term, they may offer a premium to the RBA cash rate. For other terms they may simply leave the rate at RBA cash and bank the difference (to, for example, business loans or mortgages) as their profit.
On a site such as http://www.ratecity.com.au/term-deposits/ you will notice some small differences. Whenever I find a TD mature and ready to be rolled over, I don't check any hypothetical calculators, but simply check Ratecity or the banks' website; then I'll pick the best current offer and term.
Not unlike Coles and Woolworths really: One may sell today's bananas a few cents cheaper, next week it's the other way around. But you won't find any rhyme or reason WHY.
Once you've settled on a term and amount, the calculation is simple: Most banks will use the formula "Principal times daily interest rate times number of days". Differences between their and your calculation should only occur after the decimal point. If memory serves me correctly, Banks use 360 days per year; the number of decimals they apply in their algorithm and the direction they round up or down may also differ from yours. And that would give slightly different results. Hardly worth arguing about - unless you do find a discrepancy significant enough to ask ...
Artificial Intelligence is no match for Innate Stupidity.
They use compound interest. It's usually calculated daily and paid (compounded) monthly/quarterly.
Here's the formula:
https://qrc.depaul.edu/StudyGuide200...20Interest.htm
Sure
For simplicity's sake assume interest is paid annually.
Interest rate (r) = 10%
Time (t) = 5 years
Principal (P) = $100
A=P(1+r)^t
A= $100(1+0.1)^5
A= $161.051
If interest was being paid quarterly then you'd adjust...
Interest rate (r) = 10%
Time (t) = 5 years
Principal (P) = $100
Number of compounding periods/year (n) = 4
A=P(1+(r/n))^nt
A=$100(1+(0.1/4))^4*5
A= $163.86
Multiply by $100
No. The exponential (ie the ^nt) bit is the number of times in total over the period that your money compounds. Basically, the interest rate needs to match the compounding period. So if you're compounding twice/year then (i) becomes 5%/period and the periods go from 5 to 10. See my second example above...
That second example I got 5.51.
It means if you put money in, it will start earning interest that day. But the bank will only pay interest monthly or quarterly. And compounding in this sense means earning interest on interest. I suppose you could knock up a spreadsheet that will do it all for you otherwise it's going to be very tedious, especially if you have a lot of txns going through.
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