A term deposit records money placed for a specified term under an institution's terms. The annual percentage rate does not, by itself, give the dollar interest for every possible term. A calculation also needs the principal, exact duration, payment arrangements and any compounding convention.
An annual rate describes a yearly basis. Applying the full annual percentage to a three-month term would generally overstate a simple-interest illustration. Adding interest back to a balance that actually pays it to another account creates a different error.
Every rate and amount below is fictional. These examples explain calculations and do not describe an available bank product.
A simple-interest example
Suppose a fictional deposit starts with AUD 10,000 and has a 4% annual simple-interest rate. Assume the term is exactly half a year, there are no fees and the interest is paid at maturity.
The interest is AUD 10,000 multiplied by 0.04 multiplied by 0.5. That equals AUD 200. The example's maturity amount is therefore AUD 10,200.
The same fictional principal for exactly one year gives AUD 400 of simple interest. The principal is unchanged during that year, so the calculation does not include interest on earlier interest.
Some institutions calculate by actual days using a specified annual day basis. For an explicitly assumed 365-day basis, a 90-day illustration produces AUD 10,000 multiplied by 0.04 multiplied by 90 divided by 365, or approximately AUD 98.63. Ninety days and one quarter of a year are not identical fractions.
The institution's actual terms determine the day basis and handling of leap years. A generic example cannot establish those rules for a particular account.
Payment frequency and compounding
Payment frequency describes when interest is credited or paid out. Compounding describes whether credited interest becomes part of the amount earning further interest.
For a fictional two-year deposit with AUD 10,000 at 4%, annual compounding produces AUD 10,000 multiplied by 1.04 multiplied by 1.04. The ending balance is AUD 10,816.
Simple interest over the same two-year period gives AUD 800 and a total of AUD 10,800. The AUD 16 difference comes from interest on the first year's AUD 400.
A product paying AUD 400 out to another account after the first year does not automatically compound that payment inside the original deposit. The money's destination affects the record. “Paid annually” and “compounded annually” describe different possibilities.
Why an estimate and statement can differ
Dates, rounding, rate conventions and payment frequency can explain a mismatch between a basic calculator and a bank's statement. An early withdrawal or renewal can create another transaction under separate terms.
A renewal also starts a new period. Carrying an old maturity estimate into the renewed deposit ignores its new rate, duration or principal. A fictional deposit that renews with AUD 10,200 has a different opening principal from the previous AUD 10,000 record.
Interest before tax and cash after any deduction also need separate labels. This article does not calculate a reader's tax liability or identify a current deposit rate.
Recording the deposit in FinTarget
The Fixed Deposits module records the institution, principal, rate, start and end dates, currency and an optional maturity amount. Its default estimate uses annual compounding. That is a stated model rather than a promise to reproduce each Australian institution's calculation.
When the institution supplies a contractual maturity amount, FinTarget's override can record that figure. The override changes the estimate shown by the tracker. It does not change the bank contract or create a deposit.
An original confirmation and later interest statements show the actual principal, payments and dates. Keeping the rate basis beside those records explains a difference more precisely than adjusting a percentage until a calculator happens to match.