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5-year bond : maturity value and annual interest deficit?

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yorkshirelad1
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5-year bond : maturity value and annual interest deficit?

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Postby yorkshirelad1 » August 24th, 2021, 11:06 pm

I have a 5-year fixed-term savings account mature with a challenger back (no names yet)
It started Aug 2016, with £200k, at an annual rate of interest 2.2%.
The maths should be fairly straightforward. On a whim, I did a quick back-of-fag-packet spreadsheet, and I came out with £32 more (my figures are below). I even allowed for the leap year in 2020. I don't mind a few pence either way, but £32 is a bit much.

The Bank in question may say that interest is calculated daily. The discrepancy seems to come in the first year and the final year.
My beef is that the account was stated as 2.2% per year, so it doesn't matter how they calculate the interest, it shouldn't make a difference. A year is a year.
Am I missing something obvious? Is this worth pursuing? Would the regulator be able to offer any guidance?
What do other Fools think?
TIA
(PS: I'm interested in an apparent anomaly in how the interest is calculated, and not raising the issue here of whether I should be putting money at those rates, or whether I should be splitting the £200k across more than one institution as it's in excess of the FSCS £85k; I am conscious of both matters)


scotia
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Re: 5-year bond : maturity value and annual interest deficit?

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Postby scotia » August 25th, 2021, 4:41 pm

If I ignore the leap year and simply say that it is compound interest at 2.2% for 5 years, then it is 1.022 to the power 5 multiplied by your original investment, which I make out to be £222989.53. If they add an extra day for a leap year (which I doubt) then that will add about £13 which gives 223002.5 - in agreement with your calculation. At a guess, they may ignore the leap year, and part of the first and last days - which they consider incomplete due to the transfer of funds.

DrFfybes
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Re: 5-year bond : maturity value and annual interest deficit?

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Postby DrFfybes » August 26th, 2021, 12:50 pm

Interest in year 1 is £12.05/day on a 365 day year.

Your first year interest seems to ignore £18.03, which is a rather strange 1.5 days of interest.

Year 2 and 3 you get the correct 2.2%.
Year 4 you get an extra day, £4696.42 would be 2.2% but divide by 365 and times by 366 = £4709.29.

In the last year you would expect £4800.02 for a full 365 days (£13.15/day), but you lose £13.11, which isn't quite a full day.

I can see losing a full day at either end, but the initial extra half day loss is a bit strange.

Paul

tjh290633
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Re: 5-year bond : maturity value and annual interest deficit?

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Postby tjh290633 » August 26th, 2021, 3:06 pm

I know that some institutions have funny ways of calculating so called daily interest, where 350 days, rather than 365 or 366 are used. They still charge the 350ths on each calendar day.

Maybe looking at how the firm involved do their calculations might be a first step.

yorkshirelad1
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Re: 5-year bond : maturity value and annual interest deficit?

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Postby yorkshirelad1 » August 26th, 2021, 10:15 pm

Thanks for the useful replies, which help confirm my thoughts. I have had an initial reply from the institution, which is their default position and is to claim their calculations are right

Bank wrote:Thank you for your message. Interest is calculated in the following way: Balance of account multiplied by the Interest Rate divided by either 366 calendar days for leap year or 365 for non-leap year gives the daily interest amount then multiplied by the amount between the deposit date and interest capitalisation date. Your account has been reviewed from inception date and cross referenced with our manual calculation and we confirm there is no discrepancy of interest paid.


They haven't explained how they differ from their T&Cs which say 5 years at 2.2%. They do say that interest is calculated daily, and applied annually. In my view, 5 years at 2.2% means 5 years at 2.2%, not with a day lopped off either end, and in their favour. I've sent their reply back for further information. I tempted to push this as I've had a similar issue before (again in their favour) which was slightly clouded, this time it's clear cut. If it was a few pence either way, I wouldn't mind, but £32 is taking the p*ss.


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