Australian (ASX) Stock Market Forum

# Interest on Term Deposit accounts

#### tom82

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

#### pixel

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 ... :1zhelp:

#### tom82

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.
I'm not sure you understood the question. Lets see if I can word it a different way.
What is the formula used to calculate interest on a term deposit account?

Thank you

#### pixel

I'm not sure you understood the question. Lets see if I can word it a different way.
What is the formula used to calculate interest on a term deposit account?

Thank you
sorry Tom,

I accidentally sent the first part off before I had completed the reply #### tom82

sorry Tom,

I accidentally sent the first part off before I had completed the reply Ok, no worries, what was the second part?

#### DJG

I'm not sure you understood the question. Lets see if I can word it a different way.
What is the formula used to calculate interest on a term deposit account?

Thank you
Do you want simple or compound interest?

#### tom82

Do you want simple or compound interest?
Which do banks use?

Both would be good to know.

Thanks

#### McLovin

Ok, thank you.

So to clarify, the formula is?

A = P * (1 + r/n) * n * t

Where / how do you find out how often they calculate the interest, haven't seen anything on bank sites stating how often they do that?
No it's ^nt.

All the info should be in the t&c's, product disclosure statement etc.

#### tom82

No it's ^nt.

All the info should be in the t&c's, product disclosure statement etc.
^ ?

To the power of.

#### tom82

To the power of.

To help me understand this better would you be able to show me an example of how to do this calculation?

Thanks

#### McLovin

To help me understand this better would you be able to show me an example of how to do this calculation?

Thanks
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

#### tom82

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
I did the calculation and got 1.61051.

If the time was less than a year say 90 days or 180 or some such would you replace 5 with the number of days?
Do you need to tell the calculation how often the interest is calculated in the time?

#### McLovin

I did the calculation and got 1.61051.
Multiply by \$100

If the time was less than a year say 90 days or 180 or some such would you replace 5 with the number of days?
Do you need to tell the calculation how often the interest is calculated in the time?
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...

#### tom82

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...
So if a bank says they calculate the interest every day of the term do mean they are compounding it everyday, is it the same thing?

#### tom82

That second example I got 5.51.

#### McLovin

So if a bank says they calculate the interest every day of the term do mean they are compounding it everyday, is it the same thing?
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.

#### tom82

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.
Ok, I get that if you put money in it starts earning interest the same day. Yes, I have seen monthly, quarterly and at maturity.
So does that mean they only compound on the day they pay the interest? 