Introduction
This page runs through interest calculation and compounding examples for Passbook style savings account.
There are two methods to calculate the interest on passbook savings:
- The daily balance method; and
- The average daily balance method.
The examples below use end-of-day-balances and refer to the interest compounding period used.
The interest compounding period is the span of time at the end of which savings in a client’s account earn interest. Interest periods may vary; they may be daily, weekly, bi-weekly, monthly, semi-monthly, quarterly, semi-annual or annual.
Examples of each method are provided using account activity for one month and the interest is calculated at the end of the day, end of the month - 31st Mar 2013
Account Activity
The client makes the following transactions throughout the month:
Transaction | Date | Amount | Balance(EOD) | Number of Days | Cumulative Balance |
---|---|---|---|---|---|
Balance | 28th Feb 2013 | 0 | 0 | - | 0 |
Deposit | 1st Mar 2013 | 1200 | 1200 | 1 | 1200 |
Withdrawal | 2nd Mar 2013 | 100 | 1100 | 8 | 8800 |
Withdrawal | 10th Mar 2013 | 400 | 700 | 5 | 3500 |
Deposit | 15th Mar 2013 | 200 | 900 | 1 | 900 |
Withdrawal | 16th Mar 2013 | 900 | 0 | 2 | 0 |
Deposit | 18th Mar 2013 | 200 | 200 | 3 | 600 |
Deposit | 21st Mar 2013 | 700 | 900 | 10 | 7000 |
Withdrawal | 31st Mar 2013 | 100 | 800 | 1 | 800 |
31 Days | 22800 |
Compounded Daily on Daily Balance
Based on 365 days in year, Nominal Annual Interest Rate: 5% and a daily compounding period, monthly crediting period:
Daily Rate is: 0.0001369863014 ==> (0.05 x (1/365)).
The formula is: Interest = Balance x Daily Rate x Number of Days
Date | Starting Bal | End Of Period Bal | Days | Interest Earned | Total Interest Compounded |
---|---|---|---|---|---|
1st Mar | 0 | 1200 | 1 | 1200 x 0.0001369863014 = 0.1643835617 | 0.164383562 |
2nd Mar | 1200 | 1100 | 1 | 1100 + (compounded interest to date) x DR = 0.1507074499 | 0.3150910116 |
3rd Mar | 1100 | 1100 | 1 | 1100 + (compounded interest to date) x DR = 0.1507280947 | 0.4658191063 |
1100 | 1100 | 1 | 1100 + (compounded interest to date) x DR = 0.1507487424 | 0.6165678487 | |
1100 | 1100 | 1 | 1100 + (compounded interest to date) x DR = 0.1507693929 | 0.7673372416 | |
1100 | 1100 | 1 | 1100 + (compounded interest to date) x DR = 0.1507900462 | 0.9181272878 | |
1100 | 1100 | 1 | 1100 + (compounded interest to date) x DR = 0.1508107024 | 1.068937990 | |
1100 | 1100 | 1 | 1100 + (compounded interest to date) x DR = 0.1508313614 | 1.219769351 | |
9th Mar | 1100 | 1100 | 1 | 1100 + (compounded interest to date) x DR = 0.1508520232 | 1.370621374 |
10th Mar | 1100 | 700 | 1 | 700 + (compounded interest to date) x DR = 0.09607816734 | 1.466699541 |
1100 | 700 | 1 | 700 + (compounded interest to date) x DR = 0.09609132872 | 1.562790870 | |
1100 | 700 | 1 | 700 + (compounded interest to date) x DR = 0.09610449193 | 1.658895362 | |
13th Mar | 1100 | 700 | 1 | 700 + (compounded interest to date) x DR = | |
14th Mar | 1100 | 700 | 1 | 700 + (compounded interest to date) x DR = | |
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Compounding Monthly on 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.
The average daily balance should be rounded to five or more decimals, in this case $800.00000.
The periodic interest rate would be 0.00424657534 (0.5 x (1/365) x 31)
Step 1 5.0 divided by 100 Result: 0.05
Step 2 0.50 times 1/365 Result: 0.000136986
Step 3 0.000136986 times 31 Result: 0.004246575
Step 4 0.004246575 times $800 Result: 3.397260274
Step 5 Rounded Result: $3.40