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I have a CIBC premium growth account that offers a "0.20% interest rate on every dollar you save calculated daily and paid monthly". I'm just curious as to what the 20% Premium Growth interest rate exactly entails. From what I gather, it means that 20% of my closing balance each day will be added up over the course of a month and then given once the month is over.

For example, if I have $500 in my account throughout an entire month and earn $100 daily as a result of the 20 percent interest rate. Would that mean I earn $3000 as a result of the interest (30 day month) or am I gravely mistaken (which I'm suspecting)? Because if that's the case, I could accumulate large sums of money very quickly if my balance is in the thousands or even higher.

For reference, here is the account description page. https://www.cibc.com/ca/chequing-savings/premium-growth-acct.html

Thanks!

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    The rate is 0.20%, not 20%. Don't quit your day job yet! :-) – BrenBarn Aug 10 '14 at 5:34
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    Your $100 will get you about 20 cents per year, roughly. – chili555 Aug 10 '14 at 11:27
  • I'm trying to understand how you made the leap to 20% from 0.20% :O – karancan Aug 11 '14 at 1:47
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    The $100 daily hints at a second problem. It's not 20%/day, not even 0,20%/day (a factor 100 off), but 0.20%/year (another factor 365). So in total the estimate was optimistic by about a factor 36.500 :\ – MSalters Aug 13 '14 at 13:21
  • A combination of being hopelessly optimistic and reading it wrong. Well this interest rate definitely isn't anything to gawk at. – SS' Aug 14 '14 at 4:33
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It means that at the end of each month, the APY, divided by 365 (366 for leap years) is multiplied by your account's ending balance on each day of that month, then those interest amounts are summed up and paid out.

It's exactly equivalent to the "Average Daily Balance" method; at the end of each month, the balance of your account on each day is summed, divided by the number of days in the month, then that number is multiplied by the APY / 365 * (number of days in the month). If you write out all these terms and simplify, you'll find the two boil down to exactly the same calculation being performed in different order (possibly with differing potential for rounding error). The only difference between them is whether the daily interest percentage is distributed to each daily balance or applied to the sum, and whether there's an additional redundant pair of steps of dividing and then multiplying by the number of days in the month.

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it means that 20% of my closing balance each day will be added up over the course of a month and then given once the month is over.

Yes apart from the typo 0.20% of every day balance. The rate itself is quoted for a year, so for a day it will be (Px0.20)/(100x365). Where P = The principal amount of every day. The credits will be every month-end. For leap year will be 366. Check with your Bank quite a few Banks still use the old convention of 360 days in year.

  • Wouldn't the banks working on a 360 day basis be paying a very tiny extra amount for their use of an old convention? – DJohnM Aug 10 '14 at 18:12
  • @User58220 Yes they would. It is still widely used in US. It also becomes the Banks USP saying they are actually favouring the customers – Dheer Aug 11 '14 at 13:28
  • It's interesting that the linked CIBC web-site does not seem to specify anywhere that the 0.2% interest rate is "annual". – DJohnM Aug 11 '14 at 16:38
  • @JoeTaxpayer Would it not be the case that the bank would use APY/EAR convention, not APR as you suggest, to quote the interest rate? I believe banks typically report APY to make their rates look attractive. – farnsy Aug 13 '14 at 1:22
  • @farnsy - My edit was a minor typo, your comment should be directed at Dheer. – JoeTaxpayer Aug 13 '14 at 2:03

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