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The examples below use end-of-day-balances and refer to the interest posting & compounding periods used.
Terms
Compounding Period: is the span of time which at the end of the interest earned over this period on the savings account balance in accumulated with the balance of the account is applicable for interest calculations in future periods. As a result the interest is compounded. The following compounding period frequencies are supported:
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| Date | Transaction | Amount |
|---|---|---|
| 01 Mar 2013 | Deposit | 1200 |
| 02 Mar 2013 | Withdrawal | 100 |
| 10 Mar 2013 | Withdrawal | 400 |
| 15 Mar 2013 | Deposit | 200 |
| 16 Mar 2013 | Withdrawal | 900 |
| 18 Mar 2012 | Deposit | 200 |
| 21 Mar 2012 | Deposit | 700 |
| 31st Mar 2013 | Withdrawal | 100 |
Daily Balance Method
Compound Interest Forumula using in Daily Compounding:
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| Date | Up to & (inclusive) | Days | Type | Amount | Opening Bal | Closing Bal | Interest on Bal | Interest To Date | Balance For Compounding | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
01/03/2013 | 01/03/2013 | 1 | Deposit | 1200 | 0 | 1200 | 0.164383562 | 0.164383562 | |||||||||
| 02/03/2013 | 09/03/2013 | 8 | Withdrawal | 100 | 1200 | 1100 | 1.206237813 | 1.370621375 | |||||||||
| 10/03/2013 | 14/03/2013 | 5 | Withdrawal | 400 | 1100 | 700 | 0.480522469 | 1.851143844 | |||||||||
| 15/03/2013 | 15/03/2013 | 1 | Deposit | 200 | 700 | 900 | 0.123541253 | 1.974685097 | |||||||||
| 16/03/2013 | 17/03/2013 | 2 | Withdrawal | 900 | 900 | 0 | 0.000541047 | 1.975226144 | |||||||||
| 18/03/2013 | 20/03/2013 | 3 | Deposit | 200 | 0 | 200 | 0.083014888 | 2.058241032 | |||||||||
| 21/03/2013 | 30/03/2013 | 10 | Deposit | 700 | 200 | 900 | 1.236458229 | 3.294699261 | |||||||||
| 31/03/2013 | 31/03/2013 | 1 | Withdrawal | 100 | 900 | 800 | 0.110040370 | 3.404739631 | 803.404739631 | ||||||||
| End of posting /compouding Periodperiod | 31 | 3.40 to be posted | |||||||||||||||
| 01/04/13 | 30/04/2013 | 30 | Interest Posting | 3.40 | 800 | 803.40 | 3.308210288 | 3.308210288 | 806.797260274 | ||||||||
| 01/05/13 | 31/05/2013 | 31 | none | 0 | 803.40 | 803.40 | 3.432803347 | 36.432803347 | |||||||||
| 727356165 | 810.001643836 | ||||||||||||||||
| 01/06/13 | 30/06/2013 | 30 | none | 0 | 803.40 | 803.40 | 3.335964006 | 10.056657535 | 3.335964006813.555712329 | ||||||||
| End of posting period | 91 | 122 | 10.06 to be posted | ||||||||||||||
| Total | 813.48122 | ||||||||||||||||
Compounded Monthly on Daily Balance
Based on 365 days in year, Nominal Annual Interest Rate: 5% and a monthly compounding period, monthly crediting period:
Daily Rate is: 0.0001369863014 ==> (0.05 x (1/365)).
The formula is: Interest = Balance x Daily Rate (DR) x Number of Days
The Balance in this case is always the end of day blance plus and cumulative interest earned in the compounding periods before hand (which in this case is previous months).
| Date | Starting Bal | End Of Period Bal | Days | Interest Earned | Total Interest Compounded |
|---|---|---|---|---|---|
| 1st Mar | 0 | 1200 | 1 | 0 | |
| 2nd Mar | 1200 | 1100 | 8 | 0 | |
| 10th Mar | 1100 | 700 | 5 | 0 | |
| 15th Mar | 700 | 900 | 1 | 0 | |
| 16th Mar | 900 | 0 | 2 | 0 | |
| 18th Mar | 0 | 200 | 3 | 0 | |
| 21st Mar | 200 | 900 | 10 | 0 | |
| 31st Mar | 900 | 800 | 1 | 0 | |
| 800 | 31 | Total interest earned = 3.40 credited on 1st April 2013 | =3.397260275 |
There is no difference between daily compounding and monthly compounding on what interest is credited at the end of the month after rounding: 3.40
The daily compounding results in (3.404197546 - 3.397260275 =) 0.006937271 more interest at the end of the month given the example account activity.
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| 13.46 posted |
|---|
Average Daily Balance
Average Balance Steps
The accumulated end-of-day balance of $24,800 is divided by the total number of days in the period (31) to find the average daily balance of $800.
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