From: Alex 
Newsgroups: uk.finance
Subject: Re: Mini Cash ISA / Interest Rate question
Date: 7 Feb 2004 22:13:52 GMT

Without a hint of irony, "-"  astounded uk.finance on
07 Feb 2004 by announcing: 

> I'm considering getting a Mini Cash ISA. I'm wondering how to go about
> working out whether it is more financially beneficial to receive
> interest paid monthly or annually.
> 
> Am I right in thinking that if the interest rates are as follows:
> 
> a) Annually: AER Gross p.a variable (starting at 4.35%)
> b) Monthly: Gross p.a variable starting at 4.27%

So you're thinking of IF then, yes?  :-)

> that if the amount invested was for arguments sake was £100, after month
> 1 b) would be worth £104.27

Not a chance.  Monthly interest on £100 at 6.9% (since that's what I'm 
charged on my loan, that's what I get on my ISA) is just over 50p.

> whilst a) is still £100 but at the end of
> the year can be said to have been worth £104.35?

If you invest £100 and leave it there for 1 year then:
If your AER is 4.35% then at the end of the year you'll have earned exactly 
£4.35 interest;
If your AER is 4.27% then you'll have earned a maximum of £4.27 interest, 
possibly less if you withdraw the interest each month?

> If that's so, then month 2: is a) £100 (£108.89) and b) £108.72?

No.  That would make your monthly rate 4.xx%, not your annual rate which 
would be nearer 67% - although it would be nice if you could get that.

> Is this right - will the 4.35 annual payment always be worth more at the
> end of the year than the slightly lower monthly payment?

I'd have thought so; that's the point of being quoted the AER after all.