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Is it possible for the APY on a CD to be lower than the APR? I noticed a bank disclosing a APY of 2.16 APY on a five year CD and a APR of 2.25%? They don't compound. Interest is paid at maturity or by check.
Answer:
Let's start by correcting a term in your question. The term APR relates to the cost of credit, not to interest on a deposit account. Your question is rephrased as "Is it possible for the annual percentage yield (APY) on a certificate of deposit (CD) to be lower than the interest rate?"
The answer is yes, but it only occurs in cases such as the one you've described. The CD is written for more than one year, interest is not compounded and is not paid until maturity.
If the institution requires interest to be paid out (by check or EFT) at least annually, the APY can be stated as equal to the interest rate (see Part I-E of Appendix A to Regulation DD), but if the institution does not impose that requirement and the depositor elects to take payments at least annually, the APY is calculated as if all interest is paid at maturity, and will be lower than the interest rate. In such cases, the APY formula produces a result that is lower than the interest rate.
First published on BankersOnline.com 10/11/10
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