For time accounts over one year with no compounding, why is the A.P.Y. less than the dividend rate?
The basic formulas in Appendix A of Part 707 use annual compounding. The intent is to provide a uniform measurement system to report the dividends earned, as a percentage, to members. As shown in the above question, a one-year deposit with no compounding will result in a dividend rate equal to the A.P.Y. (In this case, the dividend rate is actually compounded once, at the end of the year.) If the term of the transaction is longer than one year, the dividend is compounded only once, at the end of the term. For a two-year period, the compounding interval is two years. It is common knowledge that if the dividend rate is compounded more often, the amount of the dividend increases. The reverse is also true: if you compound the dividend rate less often, the dividend amount decreases. In our example, compounding the dividend rate once every two years will result in a lower dividend amount than if we compounded the rate annually. Because Appendix A of Part 707 computes the A.P.Y. based on annu
