For time accounts over one year with no compounding, why is the A.P.Y. less than the interest rate?
The basic formulas in Regulation DD use annual compounding. The intent is to provide a uniform measurement system to report the interest earned, as a percentage, to depositors. As shown in the above question, a one-year deposit with no compounding will result in an interest rate equal to the A.P.Y. (In this case, the interest is actually compounded once, at the end of the year.) If the term of the transaction is longer than one year, the interest 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 you compound interest more often, the amount of interest paid increases. The reverse is true if you compound interest less often–the amount of interest decreases. In our example, compounding the interest once every two years will result in a lower amount of interest paid than if we compounded it annually. Because Regulation DD computes the A.P.Y. based on annual compounding, the A.P.Y. for a two-year de
