I bought a $1,000 certificate from a local bank. When it expired after 89 days, I received $1,039.56. It was to have paid 16 percent. How do they arrive at this amount of interest? It seems that this is short of 16 percent.
When a bank, or any other financial institution, gives you an interest rate, it is almost always figured on an annualized basis. Thus, anytime you are given an interest rate, read the fine print or ask the question directly: ''Is this an annual rate?''
A striking example of how financial institutions do this occurred last year, when banks and savings institutions were trying to get people to purchase the new All-Savers certificates. If people would just deposit their money a few weeks before the certificates were officiallly available, the bank advertisements declared, customers would be paid 20, 30, even 40 percent on those early deposits. Of course, that rate only applied for the few weeks left until the All-Savers certificates started, so if someone put in his money a month early, he'd only get one-twelfth of the sky-high return.
With your certificate, it would have earned $160 if you had been able to keep it for an entire year. But since it matured in just 89 days - slightly less than three months, or one quarter of the year - your $39.56 profit was slightly less than one quarter of $160.