Interest rate calculations

[mtbc]

I was thinking how tricky interest rate calculations might be for institutions. One typically wants to quote an annual percentage but give interest more often than that. In terms of how the payments add up to the annual total, we certainly don't want that sum to be less than the quoted percentage but we would also rather it be as low as possible. Yet, when we pay interest, it's not like we pay exactly a twelfth root or whatever, or probably even calculate roots as precisely as we could, and we somehow round each payment to probably just a couple of places depending on the currency we're using. Further, absent withdrawals, the interest payments increase steadily due to compounding. In practice, I wonder how institutions deal with such payment calculations where each is rounded yet what matters is the sum of the payments.

Comments

[mtbc]

If rounded fairly conventionally each month then if I have 50¢ and earn monthly interest then a 12% annual rate leaves me with still 50¢ at the end of the year. 60¢ would get me up to 72¢ at the end of the year, effectively a sweet 20%. Perhaps that's actually what happens, hmm.

Nice they're getting rid of the tiny change for cash though.