Like everything else, the term deposit rates are determined by supply and demand.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
I'm not sure you understood the question. Lets see if I can word it a different way.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.
sorry Tom,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
Ok, no worries, what was the second part?sorry Tom,
I accidentally sent the first part off before I had completed the reply
Do you want simple or compound interest?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
Which do banks use?Do you want simple or compound interest?
They use compound interest. It's usually calculated daily and paid (compounded) monthly/quarterly.Which do banks use?
How about both?
Both would be good to know.
Thanks
Ok, thank you.They use compound interest. It's usually calculated daily and paid (compounded) monthly/quarterly.
Here's the formula:
https://qrc.depaul.edu/StudyGuide2009/Notes/Savings Accounts/Compound Interest.htm
No it's ^nt.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.
To the power of.
Thanks for the reply.To the power of.
SureThanks for the reply.
To help me understand this better would you be able to show me an example of how to do this calculation?
Thanks
I did the calculation and got 1.61051.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
Multiply by $100I did the calculation and got 1.61051.
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...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?
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?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...
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.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?
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.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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