Understanding Bank Accounts

Savings Accounts

Savings checking account is oldest available banking instrument available for savings of customers. It provides nominal interest payments with checking account facilities with profit distribution after every six months with no minimum balance requirements and client enjoys the benefits of normal savings account.

Every interest payment made by the financial institution on savings account is subject to tax depending on the federal tax laws of the country.

Market segment for this type of account is everyone except business entities. Some countries have profit distribution policy on every quarter end.

Savings Checking Account Interest Calculations

Profit Payment= Average Balance of Six Months x (Interest Rate/ 365) x 180

Net Profit = Profit Payment - Tax

Note: However 180 days can fluctuate depending on no of days between decided period by the regulatory authority

Term Deposit Account (TDR)/Certificate of Deposit (CD)

Term deposit is like loan given to a bank for fixed tenure at pre decided fixed rate. The APY (Annual Percentage Yield) applicable at different tenures are aligned with LIBOR or any money market index operating. Term deposit can take place as low as 7 days to 5 years with most banks encouraging up to two years tenure. Term deposit is automatically renewed after its maturity on same tenure but not surely on the same interest rate.

Term Deposit Interest Calculations

Profit Payment= Principal Deposit x (Interest Rate/ 365) x days in tenure

Net Profit = Profit Payment - Tax

High Yield Account

High yield account is specifically designed to cater high class deposit on business individuals. Customer are required to maintain high balance at all time to enjoy the benefit of greater yields calculated on daily basis with monthly payment options.

High Yield Interest Calculations

Profit Payment=Average Balance of a month x (Interest Rate/ 365) x 30

Net Profit = Profit Payment – Tax

Note: However 30 days fluctuate depending on number of days of a month in calendar year.

Tax Deduction

Mostly federal tax laws recover taxes at source, which means right at the time of payment of profit by banks. Net Profit Payment comes after the deduction of taxes.

Time Value of Money
To calculate Future Value (FV) of a principal amount invested for a specific tenure compounded monthly

Future Value (FV) = Present Value (PV) x (1+i/n)^nt

Where
Fv: - Future Value
Pv: - Present Value
I: - Applied Interest Rate
N: - number of times interest payments are made in one year
T: - no of years

Call Deposit (CD)
Call deposit is kind of fixed deposit for indefinite period at the time of booking however in case of 1 day call deposit, the customer needs to give written notice to the bank in advance before taking out the funds. The profit rate will be applied on the number of days the deposit was kept in call deposit. Similarly, 7 day call deposit has same mechanism.