Fixed Deposit Fundamentals (Am I going crazy?)

[pozmans]

Can someone clear up what I thought was a really simple concept... Fixed Deposits.

So for interests sake (excuse the pun), let's use FNB's (R10 000 single deposit) 12 month rate of 8.20%. I was under the impression that the 12 month rate of 8.20% is not compounded monthly but rather simple interest, meaning you'd earn R820 in interest, rather than R851.53 if it were compounded monthly.

Please could someone confirm what the standard compounding period is for the stated rates on the bank's websites?

 

[Chevron]

Can someone clear up what I thought was a really simple concept... Fixed Deposits.

So for interests sake (excuse the pun), let's use FNB's (R10 000 single deposit) 12 month rate of 8.20%. I was under the impression that the 12 month rate of 8.20% is not compounded monthly but rather simple interest, meaning you'd earn R820 in interest, rather than R851.53 if it were compounded.

Please could someone confirm?

https://www.fnb.co.za/invest/fixed-deposit.html

On that page it says you can re-invest or re-direct the interest.

So you can choose if you want it compounded or not.

 

[Jehosefat]

According to the website they are nominal rates which would imply that they are not simple interest.

I can't say for sure but the general standard is NACM (Nominal Annual Compounded Monthly). So a 12% nominal rate would be 1% per month, compounded monthly. So an effective rate of just over 12.68%.

 

[Rkootknir]

According to the website they are nominal rates which would imply that they are not simple interest.

I can't say for sure but the general standard is NACM (Nominal Annual Compounded Monthly). So a 12% nominal rate would be 1% per month, compounded monthly. So an effective rate of just over 12.68%.

^This. Rate is almost certainly NACM and interest is usually calculated daily and capitalised monthly. Depending on when the bank capitalises interest the calcs (using Excel notation) usually go like this for, let's say, a deposit of R10 000 on 1 January 2016:

Interest for Jan: R10 000*8.20%*31/365.25 (This depends on bank - some use actual day count and not average)
= R69.60
C/B @ 31/01/2016 = R10 069.60

Interest for Feb: R10 069.60*8.20%*29/365.25 = R65.56
C\B @ 29/02/2016 = R10 135.16

Interest for Mar: R10 135.16*8.20%*31/365.25 = R70.54
C\B @ 31/03/2016 = R10 205.70

etc up to:

Interest for Dec: R10 778.35*8.20%*31/365.25 = R75.01
C\B @ 31/12/2016 = R10 853.36

This implies that the effective rate p.a. is 8.53% which is very close to result you'll get by approximating the effective rate on a monthly basis: (1+0.082/12)^12-1=8.5153%, i.e. R10 851.53