Interest rates for deposit accounts – the proportion of the deposit that is charged as interest, typically expressed as an annual percentage.
Interest, in general, is the amount a lender charges for the use of assets. For deposit accounts, interest is the amount banks pay depositors for the use of the depositor’s cash.
Nominal Interest Rates
The table below shows the interest rates on savings and time deposit accounts for some of the biggest banks in the Philippines. The rates are in per cent per annum (%pa) and are known as nominal interest rates, advertised interest rates, or stated interest rates.
|Regular Peso Savings Deposit||0.125%||0.125%||0.1250%||0.10%|
|Special Peso Savings Deposit (P1Mn)||0.125%||0.1250%||0.25%|
|Peso Time Deposit – 90 Days (P1Mn)||0.125%||0.250%||0.1875%||0.34%|
|Peso Time Deposit – 360 Days (P1Mn)||0.250%||0.375%||0.1875%||0.64%|
Effective Interest Rate
The effective annual interest rate is the real return on a deposit account when the effects of compounding over time are taken into account. This is related to the nominal rate as follows:
Effective Annual Interest Rate = (1 + i/n)n - 1 where: i = Nominal interest rate and n = Number of periods per year
The nominal interest rate does not reflect the effects of compounding the interest. If the interest is paid out only once a year, then the nominal interest rate is the same as the effective interest rate. But if the interests are paid in smaller amounts but more frequently, the effective interest rate becomes larger than the nominal.
For example, if interest rate as advertised or stated by the bank is 5% and the interest of 0.417% (5% divided by 12) is paid every month, then i=0.125% (or 0.00125) and n=12. Substituting these into the formula will yield a value of 5.12% per annum, the effective interest rate.
The effective annual interest rate is the “true” interest rate.
Note that I do not use the term “real” interest rate as some authors do to describe the effective interest rate. Real interest refers to the interest after deducting the inflation rate. Hence, if the rate of inflation is 2%, then the real nominal interest rate for the example above is 3% and the real effective interest rate is 3.12%.
See also UITF Rates.