Calculating APY for CD
 

Hi,

What formula can I use to determine the Annual Percentage Yield (APY) for a
Certificate of Deposit. The interest rate is 5.10% anually with the
interest added back daily. The bank told me that the interest rate is 5.10%
and that would be 5.20% APY. How would they know what the APY would be?
Hope I'm making sense.
Thanks for the help,
Starlin

Calculating APY for CD
 

Hello:

I don't know how the bank does things. Banks, in some cases supported by
statute, have played fast and loose with finance rules, in particular
when they report the yield on loan documents.

In finance the effective annual rate is computed by:

EAR = (1+i/j)^j -1

Where i is the nominal annual rate, j is frequency of compounding per year.
(Note, for example, the APR is computed by (i/j)*j, which understates the
true effective rate.)

So for your data the solution would be:

(Put the following in a cell and format as percent:)

=(1+.051/365)^365 -1 = 5.2319%

Pieter Vandenberg

Starlin Dotson wrote:
: Hi,

: What formula can I use to determine the Annual Percentage Yield (APY) for a
: Certificate of Deposit. The interest rate is 5.10% anually with the
: interest added back daily. The bank told me that the interest rate is 5.10%
: and that would be 5.20% APY. How would they know what the APY would be?
: Hope I'm making sense.
: Thanks for the help,
: Starlin

Calculating APY for CD
 

Thanks

"vandenberg p" wrote in message
...
Hello:

I don't know how the bank does things. Banks, in some cases supported by
statute, have played fast and loose with finance rules, in particular
when they report the yield on loan documents.

In finance the effective annual rate is computed by:

EAR = (1+i/j)^j -1

Where i is the nominal annual rate, j is frequency of compounding per
year.
(Note, for example, the APR is computed by (i/j)*j, which understates the
true effective rate.)

So for your data the solution would be:

(Put the following in a cell and format as percent:)

=(1+.051/365)^365 -1 = 5.2319%

Pieter Vandenberg

Starlin Dotson wrote:
: Hi,

: What formula can I use to determine the Annual Percentage Yield (APY)
for a
: Certificate of Deposit. The interest rate is 5.10% anually with the
: interest added back daily. The bank told me that the interest rate is
5.10%
: and that would be 5.20% APY. How would they know what the APY would be?
: Hope I'm making sense.
: Thanks for the help,
: Starlin

Calculating APY for CD
 

Hello:

Your are welcome and one more thing.

Some banks compound at one time interval and pay at another. For example
they may quote a rate as being compounded daily but paid quarterly.
Which means in some cases if you withdraw the funds between quarters you
do not get the interest for that quarter, other pay to the date of withdrawal.

On a CD this would make no difference since you have fixed time period
and I am sure have been warned about early withdrawal penalities.

Pieter Vandenberg

Starlin Dotson wrote:
: Thanks

: "vandenberg p" wrote in message
: ...
: Hello:
:
: I don't know how the bank does things. Banks, in some cases supported by
: statute, have played fast and loose with finance rules, in particular
: when they report the yield on loan documents.
:
: In finance the effective annual rate is computed by:
:
: EAR = (1+i/j)^j -1
:
: Where i is the nominal annual rate, j is frequency of compounding per
: year.
: (Note, for example, the APR is computed by (i/j)*j, which understates the
: true effective rate.)
:
: So for your data the solution would be:
:
: (Put the following in a cell and format as percent:)
:
: =(1+.051/365)^365 -1 = 5.2319%
:
: Pieter Vandenberg
:
: Starlin Dotson wrote:
: : Hi,
:
: : What formula can I use to determine the Annual Percentage Yield (APY)
: for a
: : Certificate of Deposit. The interest rate is 5.10% anually with the
: : interest added back daily. The bank told me that the interest rate is
: 5.10%
: : and that would be 5.20% APY. How would they know what the APY would be?
: : Hope I'm making sense.
: : Thanks for the help,
: : Starlin
:
: