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Table of Contents

Introduction

This page runs through interest calculation and compounding examples for Passbook style savings account.

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Note
titleSummary

The frequency of the posting period makes no difference (or neglible difference) to the interest earned on the savings account when using compound interest. See the break down of the account activity with monthly, quarterly and yearly posting frequencies.

Daily Compounding - Monthly Posting Using Daily Balance Method

The account activity breaks down into the following End of Day Balances:

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DateUp to & (inclusive)DaysTypeAmountOpening BalClosing BalInterest on BalInterest To DateBal for Compounding(I) PostedGain/Loss Due To Rounding

01/03/2013

01/03/20131Deposit1200012000.1643835620.1643835621200.164383562  
02/03/201309/03/20138Withdrawal100120011001.2062378131.3706213751,101.370621375  
10/03/201314/03/20135Withdrawal40011007000.4805224691.851143844701.851143844  
15/03/201315/03/20131Deposit2007009000.1235412531.974685097901.974685097  
16/03/201317/03/20132Withdrawal90090000.0005410471.9752261441.975226144  
18/03/201320/03/20133Deposit20002000.0830148882.058241032202.058241032  
21/03/201330/03/201310Deposit7002009001.2364582293.294699261903.294699261  
31/03/201331/03/20131Withdrawal1009008000.1100403703.404739631803.4047396313.40-0.004739631
01/04/1330/04/201330Interest Posting3.40800803.403.3082102883.308210288806.7082102883.31+0.001789712
01/05/1331/05/201331Interest Posting3.31803.40806.713.4328033473.432803347810.1428033473.43-0.002803347
01/06/1330/06/201330Interest Posting3.43806.71810.143.3359640063.335964006813.4759640063.34+0.004035994
  122   813.48   13.48Loss of 0.003506984

Daily Compounding - Quarterly Posting Using Daily Balance Method

The account activity breaks down into the following End of Day Balances:

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DateUp to & (inclusive)DaysTypeAmountOpening BalClosing BalInterest on BalInterest To DateBal for Compounding(I) PostedGain/Loss Due To Rounding

01/03/2013

01/03/20131Deposit1200012000.1643835620.1643835621200.164383562  
02/03/201309/03/20138Withdrawal100120011001.2062378131.3706213751,101.370621375  
10/03/201314/03/20135Withdrawal40011007000.4805224691.851143844701.851143844  
15/03/201315/03/20131Deposit2007009000.1235412531.974685097901.974685097  
16/03/201317/03/20132Withdrawal90090000.0005410471.9752261441.975226144  
18/03/201320/03/20133Deposit20002000.0830148882.058241032202.058241032  
21/03/201330/03/201310Deposit7002009001.2364582293.294699261903.294699261  
31/03/201331/03/20131Withdrawal1009008000.1100403703.404739631803.4047396313.40-0.004739631
01/04/1330/06/201391Interest Posting3.40800803.40   10.08 
  122   813.48   13.48  

Daily Compounding - Annual Posting Using Daily Balance Method

The account activity breaks down into the following End of Day Balances:

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DateUp to & (inclusive)DaysTypeAmountOpening BalClosing BalInterest on BalInterest To DateBal for Compounding(I) Posted

01/03/2013

01/03/20131Deposit1200012000.1643835620.1643835621200.164383562 
02/03/201309/03/20138Withdrawal100120011001.2062378131.3706213751,101.370621375 
10/03/201314/03/20135Withdrawal40011007000.4805224691.851143844701.851143844 
15/03/201315/03/20131Deposit2007009000.1235412531.974685097901.974685097 
16/03/201317/03/20132Withdrawal90090000.0005410471.9752261441.975226144 
18/03/201320/03/20133Deposit20002000.0830148882.058241032202.058241032 
21/03/201330/03/201310Deposit7002009001.2364582293.294699261903.294699261 
31/03/201331/03/20131Withdrawal1009008000.1100403703.404739631803.404739631 
01/04/1330/06/201391No activity3.4080080010.077033616 13.481773247813.481773247Interest earned but not yet posted

Compound Interest Forumula using in Monthly Compounding:

The interest earned on a savings account balance on a given end of day is calculated using the following:

Panel
titleCompounding Interest Formula

A= Prn  where,

P = The end of day balance e.g. 1200

r = periodic interest rate so in this case daily interest rate which is worked out by dividing 1 by 365 (number of days in year) and mulitplying by 0.05 (5%)

n = number of compounding periods the balance/PV will compound - in the same period as the periodic interest rate - so in this case Days. So if a balance exists for 5 days we use n=5 to calculate what the balance produces in interest when compounding.

Note
titleCompounding Periods Matter

The frequency of the posting period makes no difference (or neglible difference) to the interest earned on the savings account when using compound interest. But the compounding periods do. Not the slight different in interest earned for monthly compounding versus daily.

 

Monthly Compounding, Monthly Posting using Daily Balance Method

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Compounded Monthly on Daily Balance

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