question about compounding interest

[dionx]

Q1. what would give me a better rate of return for a constant amount of money (and i dont continually add to it)

1) a dividend rate of 1.35% which is compounded monthly and credited monthly
OR
2) a dividend rate of 1.25% compounded daily but credited monthly

or does this question depend on the length of savings? the latter must be held for either 13 weeks and 26 weeks. i don't care about liquidity of the funds since i have no intention of using it for awhile.


Q2. how exactly does compounding and crediting work? say i have $10,000 principal and i'm taking compounding daily but credited monthly.

1) does that mean interest is only done on the principal so that the interest is the same for any day within that month?
OR
2) does it mean that interest is done on both the principal and any interest earned before that day?

 

[Taggart]

If the rate was the same the more frequent the compounding, the greater the return, though it can be a very small difference. Without breaking out the calculator I think the .1% difference is enough to make the 1.35% a month a better rate. For question 2 the beauty of compound interest is that principal and interest are considered.

One note, there may be some wacky rule that the bank is using that won't allow for true daily compounding (since it is credited monthly), I wouldn't know about that.

:beer:

 

[DaveSimmons]

A bank often lists 2 numbers APR (annual percentage rate) and APY (yield), where APY already figures in all the compounding. The APY number is often the one listed in large print with APR in smaller.

 

[dionx]

thanks for the info. i didn't know how APY factored into the dividend till now.

APY for the first one was 1.36% and APY for the 2nd one was 1.26%. makes it a no brainer in which to put my money in regardless of frequency of compounding.

 

[DaveSimmons]

One more thing, www.INGDirect.com is offering 2% APY for their FDIC insured savings account, many people here use them.