In December, Popular Direct was listing interest rates that were not consistent with the corresponding APYs. For example, for its 5-year CD, it was listing an interest rate of 1.882% and an APY of 2.05%. For a CD that compounds daily, the correct APY for an interest rate of 1.882% is 1.90%.
Readers reported that they were told by Popular Direct CSRs that their CDs that were opened during this time had the listed interest rates. That meant their real APYs on their CDs were lower than the APYs listed on Popular Direct’s website. That didn’t seem fair, so I contacted Popular Direct’s Senior Deposit Product Manager about this issue. Below is an excerpt of the reply I received by email:
We would like to thank you for bringing this matter to our attention. After reviewing the rates on the Popular Direct website, it appears that the website inadvertently displayed incorrect and lower CD rates for a period of time. This issue has been corrected effective December 22, 2016. We also checked on the rates that customers received during this time and can confirm that all customers who opened their CD accounts during this period of time were provided with the accurate rates.
So if you had opened a Popular Direct CD during this time in December when Popular Direct’s website was displaying incorrect rates, make sure that your CD is earning the correct interest rate that corresponds to the advertised APY.
Overview of Interest Rates and APYs
This issue with Popular Direct reminds us why it can be useful to look both at the interest rates and the APYs that banks list on their websites.
APY is the abbreviation for Annual Percentage Yield. The APY takes into account the interest rate and compounding period to give you a single number that represents how much you will earn from that investment in one year. To review the formula to calculate the APY from an interest rate and compounding frequency, please refer to this DA article, Understanding Interest Rate and APY.
A few simple rules of thumb can be used to estimate an APY based on an interest rate. First, when interest rates are 2% or lower, the difference between interest rates and APYs is never more than 2 basis points. For example, a CD with a 2% interest rate that compounds daily has an APY of 2.02%.
The differences between interest rates and APYs grow as rates increase. Here are some examples assuming daily compounding with rounding to two decimal places.
- 1% rate, 1.01% APY
- 2% rate, 2.02% APY
- 3% rate, 3.05% APY
- 4% rate, 4.08% APY
- 5% rate, 5.13% APY
The differences between rates and APYs diminish as the compounding frequency is reduced, but the changes are small. The following is a recalculation of the APYs using the above interest rates with quarterly compounding:
- 1% rate, 1.00% APY
- 2% rate, 2.02% APY
- 3% rate, 3.03% APY
- 4% rate, 4.06% APY
- 5% rate, 5.10% APY
For standard CDs, the APYs should be slightly higher than the interest rates as shown in the above examples. However, there can be cases when APYs are not so simple. One example is blended APY that factors in tiered rates. This is common for reward checking accounts in which a portion of a balance over a cap earns a smaller interest rate.