1.25 APY vs 1.35 APY plus 10% bonus on interest earned

April 2, 2010 5:53 PM

1.35 APY vs 1.25 APY + 10% quarterly bonus on interest earned. Help me understand which is better.

Let's say I have two bank accounts: one earning 1.35 APY and the other 1.25 APY, but with a 10% bonus per quarter on interest earned. Is the effective APY on the second account fixed (and thus easily comparable to the simple 1.35) or is it variable depending on how much I deposit?

I'd like to understand the math abstractly, but this is also a practical question... these are two real savings accounts (Discover Bank and Capital One). Assume I qualify for the conditions.

posted by danny the boy to Work & Money (6 answers total)

The 1.25 with 10% bonus quarterly on interest earned amounts to 1.375 yearly. I think the only real difference is that they are asking not to give that extra 10% till the end of the quarter. I can't see how it would vary on based on deposit amount. Is there a penalty for moving money in the quarter?
posted by Rubbstone at 6:50 PM on April 2, 2010

Best answer: Whenever I have this kind of problem I make a spreadsheet.
Here, have a spreadsheet.
posted by jewzilla at 9:25 PM on April 2, 2010

Also, the bonus is actually paid out 4-8 weeks after the end of the quarter, which would change the numbers a bit. But just by a tiny amount, since it's only 4-8 weeks of compounding on 10% of the already tiny amount of interest.
posted by smackfu at 9:50 AM on April 3, 2010

Response by poster: So it looks like there's an error on your spreadsheet Jewzilla, where you're calculating 1.025 and 1.035 instead of 1.25 and 1.35; does that change the result? Is that why in your spreadsheet the normal account wins (1.0275 vs 1.035) and for Rubbstone the bonus account wins (1.375 and 1.35)?

(I don't have permission to edit that spreadsheet, or else I would tinker with it. I just tried to make my own but my excel knowledge is pretty poor.)
posted by danny the boy at 10:49 AM on April 3, 2010

Oops, I fixed the percentage. I also modified it to apply the bonus 2 months after the end of the quarter, which is very close to 8 weeks (but strictly more conservative). Go with the 1.35: the 8 week delay does hurt you a measurable amount. If you send me your email address I'll invite you to edit the spreadsheet.
posted by jewzilla at 3:11 PM on April 3, 2010

Response by poster: Thanks everyone!
posted by danny the boy at 11:15 AM on April 4, 2010