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Author: Radish Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 3687  
Subject: Re: Quicken's Rate of Return incorrect Date: 4/23/1998 12:42 PM
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yFool,

As I said in an earlier reply, I don't know of any banks that use annual compounding on savings accounts. I just have to use annual compounding because that's what Quicken uses (at least, that's what their help text says they use). Also, banks don't pay 200% interest, the large number just serves to highlight the problem in Quicken.

But in a more general sense, the answer to your question is yes. Typically, banks use continuous, daily, or monthly compounding on savings accounts and similar accounts. When the compounding is monthly, they generally say that "interest is accrued daily and compounded monthly". That means if you opened an account, then closed is half a month later, you would still have earned 15 days (or so) of accrued interest. If the interest rate was, say, 6%, then you'd get about 6%/24 times your investment as interest.

But to look further at eldoen's comments, let's say you do take the money out after six months and then reopen a new account. In Quicken, you could enter:

1/1/96 buy 1 share at $1000
7/2/96 sell 1 share at $2000
7/2/96 buy 1 share at $2000
1/1/97 sell 1 share at $4000

Remember, we're using a bank account with 200% annually compounded interest. So, the equivalent interest that a bank would pay is the same as the interest the bank DID pay, namely 200%. Quicken still gives the 300% answer, though. Yes, 300% is the "effective yield". But it is NOT the interest a bank would pay, which is what the help text says you get.
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