Calculating interest on fixed term bonds in leap years?

[yorkshirelad1]

Can anyone point me in the direction of what banks should do, or actually do, regarding interest in leap years for a fixed-term (e.g. 5-year) bond, or what may be recommended (by some authority) or what is good practice (ditto)

On one hand, a fixed term account at 2.35% per year for 5 years is just that, plain and simple, whether it’s 365 days or 366 days.
On the other, if a bank allocates interest daily, should they add an extra day (i.e. 1/365th of the annual interest), or should the daily rate be the interest rate divided by 365 or 366.

It’s not of critical importance to me, it’s just arisen in passing, as I’ve now seen both (see below). I'm curious what often happens, or what some authority (regulator?) might advise.

By way of example:

NS&I (https://www.nsandi.com/) issued some regulation changes in 2012 (I don’t know if they’ve been superceded, but the way they pay interest on ILSCs is consistent with these 2012 regs changes) and pay an extra day for leap years

7.10 Following changes in industry practice, it has been recognised that NS&I’s existing practice in relation to interest in a leap year causes disadvantage to customers. Children’s Bonus Bonds currently operate on the basis that the holder will receive the same amount of interest in a leap year as they would in a normal year. Regulation 7 inserts provision for the accrual of interest on a daily basis, with the result that customers will get an additional day of interest in a leap year than they would in a normal year. In order to facilitate the introduction of the new computer system this amendment is to take effect for certificates purchased after 19 September 2012 and for other certificates, from the anniversary of their date of purchase that falls after 19 September 2012 and before 20 September 2013.

source: https://www.legislation.gov.uk/uksi/201 ... 880_en.pdf

7.13 Regulation 7 of these Regulations inserts a new regulation 5A, which provides that interest for a rolled-over certificate and a new certificate is to accrue on a daily basis at a rate of 1/365th of the value of the Certificate on that day multiplied by the interest rate. The new interest rate provision will be simpler and provide a greater level of transparency for investors.

source: https://www.legislation.gov.uk/uksi/201 ... 882_en.pdf

As per the above Regulations, I am 99.9% certain that NS&I give an extra day (being 1/365th of the annual interest) on 5-year ILSCs when there is leap year day.


Shawbrook Bank (https://www.shawbrook.co.uk/) (who seem to adjust for a leap year, but don't add an extra day)

10.2 Where an interest payment period incorporates the leap year day of 29 February, the daily interest rate will be calculated to reflect that extra day. This means that the interest rate accrued on a daily basis may be different.

Source: https://www.shawbrook.co.uk/media/2149/ ... 123_14.pdf

TIA
(I am a customer of above two mentioned organisations, but no other link to them)

[joey]

On one hand, a fixed term account at 2.35% per year for 5 years is just that, plain and simple, whether it’s 365 days or 366 days.
On the other, if a bank allocates interest daily, should they add an extra day (i.e. 1/365th of the annual interest), or should the daily rate be the interest rate divided by 365 or 366.

I have implemented this calculation for a bank on both a fixed-term product and a current account (and credit cards & loans). Calculation was done per day and the rate used was a function of the number of days in the year rather than the inverse e.g. your last option mentioned above, so the daily rate for a leap year was slightly lower, although I can’t recall the exact function for the daily rate without looking again at the source code, sorry, but I do remember accounting for leap years this way.

AIUI provided the T&Cs reflect the reality then it is implementation-specific to each bank. It gets audited, at least my work did, and I’m sure other banks would be obliged to do the same for similar calculations, given they are so core to the business. I recall no regulator involvement.

[dealtn]

Can anyone point me in the direction of what banks should do, or actually do, regarding interest in leap years for a fixed-term (e.g. 5-year) bond, or what may be recommended (by some authority) or what is good practice (ditto)

Simply look at the Ts & Cs. There are different conventions. Most private individuals with regard to interest on bank accounts prefer the "simplicity" of using "actual" so that has become normal. In the Bond market it is preferred the "simplicity" of each coupon payment being "equal", so that is normal. Hybrids such as retail bonds offered by financial institutions (mostly to the retail market) sit between the 2 types of product.

Neither is "right" or "wrong".

[yorkshirelad1]

Many thanks for all the replies to this thread/question: very useful and enlightening. As said, there is no right or wrong, just different, and it is useful understanding the differences!