Tuesday, June 3, 2008

INTEREST CALCULATION IN A LEAP YEAR

Banks may vary in the number of days they consider a year in their interest calculation. This has an effect on how much interest you get in a particular year, with you more likely to be affected in a leap year such as this year (2008).

Different banks in different countries use different bases for calculation, using one of the following methods:
  • 365-day year (even for leap year)
  • 365-day year (except for leap year, when 366-day year is used)
  • 360-day year

That means that you may actually earn more (or less) interest depending on which bank you're using (and which country you're banking in).


ILLUSTRATION

Let's use this interest calculation formula to look at how the different bases affect how much interest you get.

FORMULA:
Amount in Deposit
Account
MULTIPLIED BY Interest Rate per year
MULTIPLIED BY number of days the amount is placed in the deposit account
DIVIDED BY No of days per year used as basis for calculation (365, 366 or 360 days)


So let's say that we put $100,000 in the bank for 60 days in 2008 (a leap year) at an interest rate of 5% per annum, this is what you will get at different banks:

BANK A
366-DAY YEAR BASIS IN 2008

Interest
= $100,000 x 5% x 60 days / 366

= $819.67

BANK B
365-DAY YEAR BASIS IN 2008

Interest
= $100,000 x 5% x 60 days / 365
= $821.92

BANK C
360-DAY YEAR BASIS IN 2008
Interest
= $100,000 x 5% x 60 days / 360

= $833.33


So, next time you visit your bank, you may want to ask them exactly how they calculate their interest.

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