RCI bank have a savings account with AER of 1.3% if interest paid annually. They say you can have interest paid monthly, in which case the AER would be 1.29%. They also say that the result is the same in both cases. It's that bit I don't understand. Surely the AER would have to be the same for that to be true?
Anyone explain it simply?
Got a credit card? use our Credit Card & Finance Calculators
Thanks to Rhyd6,eyeball08,Wondergirly,bofh,johnstevens77, for Donating to support the site
AER puzzle
-
- Lemon Slice
- Posts: 409
- Joined: November 4th, 2016, 10:43 am
- Has thanked: 185 times
- Been thanked: 156 times
Re: AER puzzle
I'm not an expert but I believe that the AER is calculated on the basis of the interest being paid out whilst the "End Result" includes the interest being retained in the account and thus itself earning interest.
Rob
Rob
-
- Lemon Half
- Posts: 6065
- Joined: November 5th, 2016, 9:05 am
- Has thanked: 20 times
- Been thanked: 1416 times
Re: AER puzzle
lennich wrote:Surely the AER would have to be the same for that to be true?
I would suspect there's a mandated formula which contains an approximation, probably for the monthly calculation.
Getting the same result in both cases depends on not withdrawing the interest and compounding the monthly interest also at 1.3% annualised.
-
- Lemon Quarter
- Posts: 4760
- Joined: November 14th, 2016, 7:33 pm
- Has thanked: 178 times
- Been thanked: 1377 times
Re: AER puzzle
The summary box for the RCI Bank Freedom savings account says:
1.30% AER gross variable (annual interest)
1.29% AER gross (monthly interest)
− This rate works out the same whether you have your interest paid monthly
or annually and is paid without tax deducted. This rate is effective from
05 October 2017.
− AER stands for Annual Equivalent Rate and illustrates what the interest rate
would be if interest was paid and compounded on an annual basis. Interest
will be paid monthly on the day of the month you first paid into your account
or annually on the anniversary of making your first payment.
If you compound a monthly interest rate of 1.29% / 12 for twelve months you get 1.2976545%. I expect that the annual interest rate is 1.3% and the monthly interest rate is 1.29%, giving an AER of 1.3% in both cases. I expect that the summary box is wrong. RCI Bank states elsewhere that the AER is 1.3%, without any further qualification.
1.30% AER gross variable (annual interest)
1.29% AER gross (monthly interest)
− This rate works out the same whether you have your interest paid monthly
or annually and is paid without tax deducted. This rate is effective from
05 October 2017.
− AER stands for Annual Equivalent Rate and illustrates what the interest rate
would be if interest was paid and compounded on an annual basis. Interest
will be paid monthly on the day of the month you first paid into your account
or annually on the anniversary of making your first payment.
If you compound a monthly interest rate of 1.29% / 12 for twelve months you get 1.2976545%. I expect that the annual interest rate is 1.3% and the monthly interest rate is 1.29%, giving an AER of 1.3% in both cases. I expect that the summary box is wrong. RCI Bank states elsewhere that the AER is 1.3%, without any further qualification.
Who is online
Users browsing this forum: No registered users and 36 guests