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F ederal R e s e r v e Bank
OF DALLAS
ROBERT

D. M C T E E R , J R .

P R E S ID E N T
A N D C H IE F E X E C U T IV E O F F IC E R

December 13, 1993

DALLAS, TEXAS
75 265-5906

Notice 93-129
TO:

The Chief Executive Officer of each
member bank and others concerned in
the Eleventh Federal Reserve District
SUBJECT
Proposed Amendments to Regulation DD
(Truth in Savings)
DETAILS

The Federal Reserve Board has issued for public comment proposed
amendments to Regulation DD (Truth in Savings). The proposed changes would
provide greater precision in calculating the annual percentage yields (APY)
for certain accounts.
Under the proposed revisions, the APY would reflect not only the
effect of compounding but also the time value of money for consumers who
receive interest payments during the term of the account. The amendments
would not affect accounts that make a single interest payment at maturity
(whether or not compounding occurs), nor would they affect most accounts with
daily compounding.
The Board is also asking for comments on whether a narrower
approach is preferable or if the regulation should remain unchanged, given the
potential burden associated with implementing a different calculation method
at this time.
The Board must receive comments by January 13, 1994.
Comments
should be addressed to William W. Wiles, Secretary, Board of Governors of the
Federal Reserve System, 20th Street and Constitution Avenue, N.W., Washington,
D.C. 20551. All comments should refer to Docket No. R-0812.
ATTACHMENT
A copy of the B o a r d ’s notice (Federal Reserve System Docket No.
R-0812) is attached.

For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal Reserve Bank of Dallas:
Dallas Office (800) 333-4460; El Paso Branch Intraslate (800) 592-1631, Interstate (800) 351-1012; Houston Branch Intrastate (800) 392-4162,
Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810.

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

- 2 -

MORE INFORMATION
For more information, please contact Eugene Coy at (214) 922-6201.
For additional copies of this B a n k ’s notice, please contact the Public Affairs
Department at (214) 922-5254.
Sincerely yours,

FEDERAL RESERVE SYSTEM
12 CFR Part 230
[Regulation DD; Docket No. R-0812]
Truth in Savings; Proposed Regulatory Amendment
AGENCY:
ACTION:

Board of Governors of the Federal Reserve System.
Proposed rule.

SUMMARY: The Board is publishing for comment proposed amendments to Regulation DD
(Truth in Savings) to provide a more precise calculation of annual percentage yields (APYs)
for certain accounts under a uniform method that gives consumers an enhanced basis for
comparing across a broad range of accounts. This action is taken in response to reported
difficulties that some institutions have experienced with the current formula. Under the
proposal, the APY would reflect not only the effect of compounding but also the time value
of money for consumers who receive interest payments during the term of the account. The
amendments would not affect accounts that make a single interest payment at maturity
(whether or not compounding occurs), nor would they affect most accounts with daily
compounding. The Board also solicits comment on whether taking a narrower approach -- or
leaving the regulation unchanged —is preferable, given the potential burden associated with
implementing a different calculation method at this time.
DATES: Comments must be received on or before January 13, 1994.
ADDRESSES: Comments should refer to Docket No. R-0812, and may be mailed to
William W. Wiles, Secretary, Board of Governors of the Federal Reserve System, 20th
Street and Constitution Avenue, N.W., Washington, DC 20551. Comments also may be
delivered to Room B-2222 of the Eccles Building between 8:45 a.m. and 5:15 p.m.
weekdays, or to the guard station in the Eccles Building courtyard on 20th Street, N.W.
(between Constitution Avenue and C Street) at any time. Comments may be inspected in
Room MP-500 of the Martin Building between 9:00 a.m. and 5:00 p.m. weekdays, except as
provided in 12 CFR 261.8 of the Board’s rules regarding the availability of information.
FOR FURTHER INFORMATION CONTACT: Jane Ahrens, Kyung Cho, Kurt
Schumacher or Mary Jane Seebach, Staff Attorneys, Division of Consumer and Community
Affairs, Board of Governors of the Federal Reserve System, at (202) 452-3667 or 452-2412;
for questions associated with the regulatory flexibility analysis, Gregory Elliehausen,
Economist, Office of the Secretary, at (202) 452-2504; for the hearing impaired only.
Dorothea Thompson, Telecommunications Device for the Deaf, at (202) 452-3544.

-2SUPPLEMENTARY INFORMATION: (1) Background. The Truth in Savings Act (act)
(12 U.S.C. 4301 et seq.) requires depository institutions to provide disclosures to consumers
about their deposit accounts, including an APY on interest-bearing accounts.1 The law also
contains rules about advertising deposit accounts, including accounts at depository institutions
offered to consumers by deposit brokers. The Board is authorized in section 269(a)(3) of the
act to make adjustments and exceptions that, in its judgment, are necessary or proper to
carry out the purposes of the act or to facilitate compliance with the requirements of the act.
The act is implemented by the Board’s Regulation DD (12 CFR part 230), which became
effective June 21, 1993. (See final rule published on September 21, 1992 (57 FR 43337),
correction-notice published on October 5, 1992 (57 FR 46480) , and amendments published
on March 19, 1993 (58 FR 15077).)
Time value of money in the annual percentage yield
In implementing the Truth in Savings Act, the Board sought to fulfill the Congress’s intent to
provide consumers with a uniform tool that would enable them to make informed decisions
regarding deposit accounts. In the rulemaking that resulted in the final rule of September
1992, the Board was guided by several general principles, such as establishing simple rules
that minimize the possibility of errors and compliance costs and providing institutions with
flexibility to promote a variety of product choices for consumers. This included designing a
simple, easy-to-use formula for calculating the APY.
It has since come to the Board’s attention that for some accounts the regulation’s current
formula for calculating the APY produces results that seem anomalous. The formula
assumes that interest paid remains on deposit until maturity. Because the formula sometimes
ignores the opportunity to reinvest interest received, it does not always reflect the time value
of money. When consumers receive interest payments over several years prior to maturity,
the formula produces results that seem especially anomalous, an APY that is lower than the
contract interest rate.2
Yet for other accounts in which interest is paid before maturity, the current formula
effectively reflects the time value of money in the resulting APY. This situation occurs
when interest is compounded on an account that gives consumers the option to take interest
payments at intervals when the interest would otherwise compound. In this circumstance, the

‘For convenience, the terms "APY" and APYE" (for annual percentage yield earned)
are used throughout the supplementary information.
2For example, assume a consumer deposits $1,000 in a two-year noncompounding CD
with a 6.00% interest rate. If the institution pays out interest annually, the consumer
receives $60 each year. Because the formula reflects only the total amount of interest paid
regardless of when it is paid out ($120 at the end of two years, in this example), the APY
for the two-year CD is 5.83% -- which is lower than the 6.00% interest rate.

-3APY disclosed is the same for consumers who receive interest payments as for those who
choose to leave interest in the account for compounding.3
To reduce these apparent anomalies and account for the timing of interest payments, the
Board is soliciting comment on proposed amendments to Regulation DD that provide a single
alternative formula for calculating the APY. The Board believes the act’s purposes —
providing a uniform method of computing the APY for effective comparison shopping -- are
better fulfilled by a formula that captures both total interest paid and the timing of interest
payments. Because the calculation would be more precise, the Board believes it may be
preferable to the current computation method. The Board is concerned that amending the
regulation at this time and in the manner proposed might have a significant impact on the
compliance programs many institutions have already put in place to comply with Regulation
DD. If the burden of compliance costs is shown to exceed the benefits consumers may
derive from the proposed calculation, the Board will consider whether a narrower solution,
or making no change to the regulation, may ultimately be more satisfactory.
(2) Proposed regulatory revisions.
Approach A: Proposal of additional formula
The Board is proposing for comment a new formula for the APY that reflects not only the
effect of compounding, but also the value of receiving interest during the term of the
account. Institutions offering accounts that pay interest only at maturity (regardless of
whether or when compounding occurs) and accounts that compound daily (other than
accounts involving stepped-rate calculations) would not be affected by this proposal.
The proposal bases the calculation of the APY on a commonly-used computation tool, a
standard internal rate of return formula. This formula, labeled "Formula for all accounts,"
appears in Appendix A, section I.A ., below. Although the proposed formula may be used
by institutions to calculate APYs for all accounts, at their option, use of the formula would
be required for institutions offering accounts involving stepped-rate calculations that make
interest payments prior to maturity. It also would be required for accounts that pay interest
prior to maturity if interest is not compounded daily. If any change to the current rule is
adopted, the Board contemplates providing institutions with a sufficient period —such as nine
months from the date the amendments become final - to implement any necessary changes in
operating systems before compliance with the amendments become mandatory.

^ o illustrate, assume a consumer deposits $1,000 in a one-year CD with a 6.00%
interest rate that compounds quarterly. The consumer receives $61.40 in interest at maturity,
and the institution discloses a 6.14% APY. If the consumer receives interest checks each
quarter, the current APY is still 6.14%, because the regulation requires the institution to
assume that interest continues to compound in the account until maturity. In this case the
consumer receives only $60 in four $15 quarterly payments.

-4The Board believes that the new formula would provide more helpful information to
consumers for making investment decisions in the marketplace, given that depository
institutions often offer consumers a choice regarding interest payments on deposit accounts.
After considering many alternatives, the Board believes an internal rate of return formula is
the best method for computing the APY in a way that fulfills the Congress’s intent to provide
consumers with a uniform tool to compare accounts.
The Board is aware that requiring the use of the new formula would affect existing format,
account disclosure, and advertising requirements, among others. The Board is concerned
that amending the regulation not long after its effective date could impose additional burdens
on depository institutions, and asks for general comment on the potential cost. To help
weigh the burden against the potential advantage to consumers, the Board also solicits
comment on whether commenters believe the new calculation would improve or reduce the
value of the APY in consumer comparisons of investment choices in the marketplace.4
The Board is also aware of differences in disclosed returns among various investment
products. For example, a two-year Treasury note sold at par value that bears a coupon rate
of 6.00% and makes semi-annual interest payments states a 6.00% yield. In contrast, a twoyear CD with a noncompounding 6.00% interest rate and semi-annual interest payments
would disclose a 5.83% APY under the current formula and a 6.09% APY under the
proposal. Would these kinds of differences cause significant confusion for consumers?
Approach B: Noncompounding multi-year CDs
In considering whether to propose a new APY formula, the Board discussed taking a
narrower approach that would address only the calculation of APYs for noncompounding
CDs that have maturities longer than one year and that provide interest payments at least
annually. The current formula produces a APY that is lower than the contract interest rate
even if institutions make interest payments at least annually. Under the alternative approach
considered by the Board, the APY for a multi-year CD that does not compound but pays
interest at least annually would always be the same as the contract interest rate.5 This

4For example, under the current formula, a 5.83% APY is disclosed for a two-year
CD with a noncompounding 6.00% interest rate and semi-annual interest checks. Under the
proposal, a 6.09% APY would be disclosed (reflecting the value of the semi-annual interest
checks).
5An example is a two-year CD that pays a 6.00% interest rate and does not compound
interest but pays out interest checks at the end of each year. Under the current regulation,
institutions would disclose a 5.83% APY, but under Approach B institutions would disclose a
6.00% APY whether checks are sent annually or more frequently.

-5 approach corresponds to the way in which the return is calculated on Treasury securities and
similar investments when they are purchased at par value.6
The Board recognizes that this narrower approach would produce less precise calculations
than would the use of an internal rate of return formula because the resulting APY would not
reflect differences in periodic interest distributions. For example, it would not differentiate
between annual or monthly interest payments. Compared to the current rule, how would a
narrower approach improve or reduce the value of the APY in comparing different accounts?
If commenters believe a narrower approach is preferable, how would the compliance costs to
implement the narrower rule-compare to the costs to implement the formula proposed in
Approach A?
Approach C: Leaving the regulation unchanged
In light of concerns about requiring changes soon after the regulation’s effective date and
questions about whether the costs of the proposed changes could outweigh the benefits to
consumers, the Board solicits comments on whether the regulation should be left unchanged.
(3) Section-bv-section analysis.
A section-by-section description of proposed amendments follows.
SECTION 230.2 - Definitions
Paragraph (c) —Annual percentage yield
The act and regulation define the APY as the total amount of interest that would be received
based on the interest rate and the frequency of compounding for a 365-day year. The
proposed amendment broadens the definition to treat the distribution of interest to the
consumer as the equivalent of compounding. For example, if an institution pays a 6.00%
interest rate on an account, the same APY would result whether an institution compounds
monthly or sends out monthly interest payments.
Section 269 of the act authorizes the Board to make adjustments and exceptions that are
necessary or proper to carry out the purposes of the act. The Board solicits comments on
whether an exception should be made to the definition of APY, and whether the purpose of
the regulation —enabling consumers to make informed decisions about deposit accounts —is
better met if the APY captures the time value of interest received as an interest payment
during the term of the account, as well as by compounding.

'Treasury notes and bonds provide semi-annual interest payments, and the investment
yield reflects the interest coupon rate and whether the securities are sold at a discount or a
premium.

-6Paragraph (i) —Crediting
The act and regulation require institutions to disclose crediting policies for interest-bearing
accounts. The Board proposes to define the term "crediting” to include the payment of
interest to a consumer, either by payment to the account or by check or transfer to another
account. The Board believes that using a single term to describe the various methods by
which interest is paid to a consumer will simplify the regulation (particularly Appendix A,
dealing with the APY formula). A uniform definition also would ease compliance when
institutions disclose their interest crediting frequencies. (See paragraph 4(b)(2).) The Board
believes that the term "compounding" —when interest begins to earn interest in an account -has a uniform meaning in the industry; thus, a regulatory definition is not proposed. The
Board requests comment on the proposed definition of "crediting" and on whether the term
"compounding" should be defined.
Section 230.4 —Account Disclosures
Paragraph (b)(6) —Features of time accounts
Paragraph (b)(6)(iii) - Withdrawal of interest prior to maturity
The regulation contains a disclosure for institutions offering time accounts that compound
interest and permit a consumer to withdraw accrued interest during the account term.
Institutions must currently disclose that the APY assumes interest remains on deposit until
maturity of the account and that interest withdrawals will reduce the earnings on the account.
The proposal would delete the disclosure as unnecessary since, under the proposed
amendments, the APY would reflect the receipt of interest at specific time intervals.
Section 230.5 — Subsequent Disclosures
Paragraph (a) —Change in terms
Paragraph (a)(2) -- No notice required
Paragraph (a)(2)(iv) - Changes to the frequency of interest payments initiated by the
consumer
The act and regulation require institutions to give 30-days’ advance notice of any change in
the account disclosures if the change might reduce the APY or adversely affect the consumer.
The proposal would create an exception for changes to the interest-payment intervals that are
initiated by the consumer. For example, if a consumer receives monthly interest payments
on an account and prior to maturity requests the institution to start making payments semi­
annually, no advance notice would be required. However, if an institution that permits
interest payments monthly eliminates that payment option during the term of an account,
advance notice would be required for consumers who are receiving monthly payments.

-7Section 269 of the act authorizes the Board to make adjustments and exceptions that are
necessary or proper to carry out the purposes of the act. The Board solicits comment on
whether the proposed exception to the change-in-terms notice requirements should be made.
Appendix A to Part 230 - Annual Percentage Yield Calculation
P arti. Annual percentage yield for account disclosures and advertising purposes
A. General rules
Appendix A establishes the rules that institutions use to calculate the APY. Currently, Part I
contains the calculations for account disclosures and advertisements. Two APY formulas are
provided: A "general" formula that can be used for all types of accounts and a "simple"
formula that can be used for accounts that have a maturity of one year or that have an
unstated maturity. Assumptions and other general rules regarding the formulas are addressed
in section I. A.
As discussed above, the Board proposes to add a formula that takes into account the time
value of money based on when the consumer receives interest. The general rules applicable
to all APY calculations for account disclosures and advertisements would appear in Part I.A.
A new section I.A .I. would explain the proposed new formula and accompanying rules for
calculations, and section I.A.2. would explain when institutions may use the existing
formula.
The proposal would change some assumptions. For example, the current formula generally
requires institutions to assume that all interest and principal remain on deposit and that no
transactions (deposits or withdrawals) occur during the term of the account. Because the
proposed new formula factors in the timing of interest payments, institutions would continue
to assume that no deposits occur during the term of the account, but would consider when
interest withdrawals are made.
The Board proposes to delete footnote 3 as unnecessary, given that the proposed formula
specifically factors in when interest payments are made on an account.
The Board proposes to incorporate two assumptions to provide greater flexibility and ease
compliance with the new formula. First, institutions could calculate the APY by assuming an
initial deposit amount of $1,000. Or, institutions could factor in the actual dollar amount of
a deposit, although the Board notes that the effects of rounding interest paid on a very small
deposit amount such as $25 can produce a skewed APY.
Second, if interest is paid out monthly, quarterly, or semi-annually, institutions could base
the number of days either on the actual number of days for those intervals or on an assumed
number of days (30 days for monthly distributions, 91 days for quarterly distributions, and
182 days for semiannual distributions). Appendix A currently permits institutions to use a
similar assumption for determining the number of days in the term of a "three-month" or

-8"six-month" time account, for example. (Of course, if the institution chooses to use 91 days
as the number of days for each quarter, it must also use 91 days to compute interest for those
quarters. And see § 230.7, which requires institutions to pay interest on the full principal
balance in the account each day.) To illustrate, assume the institution sends interest
payments at the end of each calendar month to consumers with six-month CDs. If the
institution bases its APY calculation on an assumed term of 183 days, the institution could
calculate the effect of monthly interest payments by using the actual days in each calendar
month or assuming five 30-day intervals and one 33-day interval.) The Board solicits
comment on the proposed assumptions.
1. Formula for all accounts
The new formula, which is a standard internal rate of return formula, could be used for all
accounts. It would have to be used for accounts that: (1) involve stepped-rate calculations
(regardless of the compounding frequency) that pay interest prior to the maturity of the
account, and (2) pay interest prior to the maturity of the account if interest is not
compounded daily. For example, institutions would use the formula to calculate the APY for
a one-year time account that compounds semi-annually and for which the consumer receives
interest payments during the year. Institutions also would use the formula for stepped-rate
accounts, with daily compounding, where the consumer receives interest payments during the
term of the account.
The proposed formula and the existing formula produce the same result for two commonly
offered accounts (and, thus, institutions could use either formula to calculate the APY): (1)
accounts where interest is paid only in a single payment at maturity (whether or not interest
is compounded), and (2) accounts not requiring stepped-rate calculations that compound
interest daily. For transaction accounts such as NOW accounts and money market deposit
accounts (MMDAs), institutions could continue to use the existing formula unless they do not
compound daily or unless they require stepped-rate calculations, in which case they would
disclose an APY based on the new formula.
The APY is determined directly from the proposed formula. For an internal rate of return
program that is standard for most calculators and software, calculations would consider the
amount and days at which payments are made in relation to the amount and day of the
deposit. Using standard programs, the calculation will result in a daily yield, which is
annualized to produce the APY.7 To ease compliance and calculations with standard
programs for internal rates of return, the proposed examples include figures such as the daily
periodic rate and daily yield. The Board solicits comment on the proposed formula and
proposed examples, and whether additional examples should be given.

’Annual percentage yield = (daily yield/100 + l)3 5 - 1.
6

-92. Formula for certain accounts
Proposed section I.A.2. contains the formulas currently in Appendix A. Institutions could
continue to use them for accounts with a single interest payment made at maturity (whether
or not compounding occurs prior to maturity). These formulas may also be used for
accounts that compound daily and pay interest prior to maturity -- except for accounts
involving stepped-rate calculations. When these formulas are used for accounts that
compound daily, the time value of money is reflected by the assumption that interest remains
in the account, even though consumers may choose to receive interest payments during the
term of the account (as Example 2 illustrates).
Institutions offering stepped-rate accounts (or variable-rate accounts with an introductory
premium or discount rate) that compound daily (or on another frequency) and pay interest
prior to the maturity of the account would be required to use the proposed formula rather
than the existing formula. Otherwise, the APY would reflect the assumption that interest
earned at the initial rate remains in the account and earns interest at the rate paid in
succeeding periods.
B. Stepped-Rate Accounts (Different Rates Apply in Succeeding Periods)
This paragraph provides two examples for calculating the APY for accounts that have two or
more interest rates that take effect in succeeding periods and are known when the account is
opened (stepped-rate accounts). Minor amendments to the text, without substantive change,
are proposed. Also, an additional example is proposed to illustrate the use of the new
formula.
C.

Variable-Rate Accounts

Appendix A currently provides that the APY for a variable rate account with an introductory
premium (or discount) must be calculated like a stepped-rate account, and provides an
example using the current "simple” formula. The Board proposes to modify the example in
Part I.C. to illustrate the use of the proposed new formula.
Part II. Annual percentage yield earned for periodic statements
Institutions that send periodic statements for interest-bearing accounts must disclose
information, including the annual percentage yield earned (APYE). The APYE is tied to the
interest earned and the account balance for the period reflected on the statement. Appendix
A, Part II, sets forth two formulas for calculating the APYE: a general formula and a
formula for accounts that compound interest and send periodic statements more frequently
than the compounding period.
Under the proposal, a savings account that compounds quarterly but permits monthly interest
payments would disclose an APY reflecting the value of receiving interest monthly rather
than quarterly. For example, an institution offering an MMDA with a 6.00% interest rate

- 10would disclose a 6.17% APY to consumers who chose to receive monthly interest payments.
However, if periodic statements are sent quarterly, the APYE would be lower than the
disclosed APY (in this example, 6.14%, assuming an initial deposit of $1,000 and no activity
in the account during the 91-day quarter).
The Board recognizes that the APYE may vary from the APY disclosed in advertisements
and in account-opening disclosures, depending on the activity in an account during a
statement cycle. This is the case regardless of whether periodic statements are sent at the
same or a different frequency as interest distributions or compounding periods. The Board
believes the proposed changes to the calculation of the APY do not require a corresponding
amendment to the rules regarding the calculation of the APYE. However, the Board solicits
comment on the potential differences between the APY that may be disclosed under the
proposal and the APYE, and whether consumers are likely to be confused by those
differences.
Appendix B —Model clauses and sample forms
1. B-l Model Clauses. Clause (b)(i) provides model language that may be used to disclose
the frequency of an institution’s compounding and crediting practices. The proposal adds a
new sentence providing model language to use when interest is credited by check payments
or transfer to another account. In accord with the proposed deletion of paragraph
4(b)(6)(iii), the Board also proposes to delete clause (h)(iii), and to redesignate clause (h)(iv)
as (h)(iii).
2. B-7 Sample Form. Given the proposed deletion of paragraph 4(b)(6)(iii) and model
clause B-l(h)(iii), the proposal would delete the last two sentences in the first paragraph of
the sample form.
3. B-7a Sample Form. The proposed new sample form illustrates a disclosure for a CD that
offers consumers the options to compound interest or to receive interest on a more frequent
basis. The form discloses which interest payment option was chosen, and an APY reflecting
that choice.
(4) Proposed additional guidance.
The proposed regulatory amendments associated with a new APY formula raise other
interpretive issues. The Board solicits comments on the issues addressed below.
Section 230.3(a) —Form
Board believes that institutions must indicate in some manner which options and yields apply
to the terms chosen by the consumer. The regulation provides institutions with great
flexibility in designing their disclosures, as long as the information is presented in a format
that allows consumers to readily understand the terms of their own accounts (see § 230.3(a)),
as illustrated in proposed B-7a Sample Form.

-11 Section 230.3(e) —Oral response to inquiries
The regulation provides that institutions must state the APY when responding to oral
inquiries about rates. For example, on a one-year CD that pays an interest rate of 6.00%,
compounds semi-annually, and permits interest to be withdrawn quarterly or monthly, the
consumer could receive an APY of 6.09% (semi-annual compounding), or 6.14% (quarterly
interest payments) or 6.17% (monthly interest payments) under the proposed formula. In
stating an APY that will vary depending on a consumer’s choice of interest payments, any of
several approaches could be taken. An institution could:
•
•

•
•

State any currently available APY.
State any currently available APY, along with any compounding or crediting period,
such as, "An annual percentage yield of 6.17% assumes you receive monthly interest
payments."
State the lowest and highest APYs fora given maturity.
State
all APYs for the account.

The Board solicits comment on which approach best serves consumers who are comparison
shopping.
Section 230.4(a) -- Delivery of account disclosures
Paragraph 4(a) (2) (ii) —Requests
The Board solicits comment on the approaches suggested for giving oral responses to
requests for information (discussed in regard to paragraph 3(e)), as they would apply to
responding to a request for written account disclosures.
Section 230.4(b) (1)(i) —Annual percentage yield and interest rate
The Board believes the regulation would require institutions offering a variety of options for
compounding or interest payments to disclose the APY reflecting the specific interest
payment or compounding option chosen by the consumer, because disclosures must reflect
the terms of the legal obligation (see § 230.3(b)). Indicating in some manner which of
several yields preprinted on a rate sheet applies to the consumer’s account would be an
acceptable way of complying. (See § 230.3(a), which provides flexibility in designing
disclosures.)
Section 230.4(b)(2) — Compounding and crediting
Paragraph (b) (2) (i) -- Frequency
The regulation requires institutions to disclose the frequency with which interest is
compounded and credited. This standard would require institutions also to specify the

- 12 crediting frequency for interest payments sent directly to the consumer or to another account,
whether by check or other means, as well as when interest is credited to the account.
The Board believes that just as the disclosure of the compounding frequency permits
consumers to correlate a higher APY with more frequent compounding periods, the
disclosure of an interest payment frequency schedule for an account could assist consumers in
understanding why APYs may vary. So, if a multi-year time account does not compound
interest but pays interest annually, the proposal would require the institution to state that
interest is credited annually. The Board solicits comment on the proposed disclosure and on
whether stating the frequency o f crediting by interest payments or transfers to other accounts
is likely to help consumers compare and understand differences in the disclosed APYs.
Section 230.5(b) —Notice before maturity for time accounts longer than one month that
renew automatically
Annual percentage yield
The regulation requires institutions to provide disclosures, including the APY, prior to
maturity of automatically renewing time accounts. If the new interest rate and APY are
known at the time the notice is sent, the Board believes institutions must state the interest
rate and APY that correspond to the specific compounding and interest payment options
applicable to the account at the time the notice is sent.
If the APY and interest rate are not known, institutions must disclose when that information
will be available and provide a telephone number for consumers. The Board believes that
oral responses giving specific APYs would be important to consumers in comparing
accounts. However, the Board recognizes the potential cost of compliance for institutions
that may not have online access to computerized account information about what options
apply to a particular account. The Board solicits comment on the approaches for disclosure
under paragraphs 3(e) and 4(a)(2)(ii) as they would apply to a renewing rollover CD.
Compounding and crediting frequency
The regulation requires institutions to disclose the specific compounding and crediting
frequency applicable to renewing CDs. (See § 230.3(b), which requires that disclosures
reflect the legal obligation of the account agreement.) The Board solicits comment on the
approaches for disclosure under paragraphs 3(e) and 4(a)(2)(ii) as they would apply to the
compounding and crediting frequencies of a renewing rollover CD. The Board solicits
comment on the potential compliance costs for tracking and disclosing the consumer’s current
choice for compounding and crediting frequencies, particularly for accounts that require
account disclosures to be given, such as CDs with maturities longer than one year.

- 13 SECTION 230.8(b) —Permissible rates
The Board solicits comment on whether an advertisement for an account offering consumers
a variety of interest payment options may state any available APY. For example, assume an
institution advertises a one-year CD that pays a 6.00% interest rate, compounds semi­
annually, and permits interest to be withdrawn quarterly or monthly. May the institution
advertise only one APY such as 6.17% (monthly interest payments), or must the
advertisement disclose all three rates: 6.09% (semi-annual compounding), 6.14% (quarterly
interest payments), and 6.17% (monthly interest payments)?
The Board solicits comment on this issue, and alternatives such as the desirability of
requiring the lowest APY also to be stated if a higher APY is quoted. How would
institutions’ advertising be affected by these alternative requirements for advertising? Would
institutions reduce the frequency of advertising yields, for example? How would these
alternatives affect the value of the information that consumers receive from advertising? The
Board also solicits comment on whether an advertisement should be considered misleading if
it does not also state the interest payment frequency used in obtaining the advertised yield.
(5) Form of comment letters. Comment letters should refer to Docket No. R-0812, and,
when possible, should use a standard typeface with a type size of 10 or 12 characters per
inch. This will enable the Board to convert the text into machine-readable form through
electronic scanning, and will facilitate automated retrieval of comments for review.
Comments may also be submitted on 3 1/2 inch or 5 1/4 inch computer diskettes in any
IBM-compatible DOS-based format, if accompanied by an original document in paper form.
(6) Regulatory flexibility analysis and Paperwork Reduction Act. The Board’s Office of
the Secretary has prepared an economic impact statement on the proposed revisions to
Regulation DD. The analysis expresses reservations about whether the proposed amendment
would significantly improve the value of the APY disclosure to consumers and concern about
the desirability of amending the regulation regarding the calculation of the APY at this time.
A copy of the analysis may be obtained from Publications Services, Board of Governors of
the Federal Reserve System, Washington, D.C. 20551, at (202) 452-3245.
The Board solicits information regarding the likely costs for complying with the proposed
changes to the APY formula, or a narrower approach that involves changes to the disclosure
of the APY for noncompounding multi-year CDs. In particular, the Board solicits comments
on the following:
•

•
•

What proportion of existing accounts would require the new formula for computing
APYs? Would institutions adopt the new formula only when required, or would they
use the new formula for all accounts whether required or not?
What changes would institutions have to make to implement the new formula
and
what would it cost institutions to make these changes?
What changes in the number of different account terms and types of accounts offered
would result if the new formula were adopted? For example, would institutions offer

- 14 consumers fewer choices? Would institutions change from compounding to
distributing the interest paid on accounts without compounding?
In accordance with section 3507 of the Paperwork Reduction Act of 1980 (44 U.S.C. 35; 5
CFR 1320.13), the proposed revisions will be reviewed by the Board under the authority
delegated to the Board by the Office of Management and Budget, after consideration of
comments received during the public comment period.
List of Subjects in 12 CFR Part 230
Advertising, Banks, banking, Consumer protection, Deposit accounts, Interest, Interest rates,
Truth in savings.
Certain conventions have been used to highlight the proposed revisions to the regulation.
New language is shown inside bold-faced arrows, while language that would be deleted is set
off with bold-faced brackets.
For the reasons set forth in the preamble, the Board proposes to amend 12 CFR part 230 as
follows:
PART 230 - TRUTH IN SAVINGS (REGULATION DD)
1. The authority citation for part 230 would continue to read as follows:
Authority: 12 U.S.C. 4301.
2. Part 230.2 would be amended by revising paragraph (c), by redesignating paragraphs (i)
through (v) as paragraphs (j) through (w) and by adding a new paragraph (i) to read as
follows:
§ 230.2 Definitions.
*

*

*

*

*

(c) Annual percentage yield means a percentage rate reflecting the total amount of
interest paid on an account, based on the interest rate and the frequency of ► interest
payments and « compounding, for a 365-day period and calculated according to the rules in
Appendix A of this part.
*

*

*

*

*

►
(i) Crediting means the payment of interest to the account or to the consumer from
the account by check or transfer to another account. <
*

*

*

*

*

3. Section 230.4 would be amended by removing paragraph 4(b)(6)(iii) and redesignating
paragraph 4(b)(6)(iv) as 4(b)(6)(iii).

- 15 4. Section 230.5 would be amended by adding a new paragraph (a)(2)(iv) to read as follows:
§ 230.5 Subsequent Disclosures.
(a) * * * * *
(2) * * * * *
► (iv) Changes to the frequency of interest payments initiated by the consumer.
Changes initiated by the consumer to the frequency of interest payments.«
5. Part 230 would be amended by revising the introductory paragraphs to Appendix A, by
revising paragraphs A and B, by revising the final paragraph in paragraph C, and by
removing footnote 3 in Part I of Appendix A, and by adding Sections I.A .I. and I.A.2. to
read as follows:
APPENDIX A to PART 230 - ANNUAL PERCENTAGE YIELD CALCULATION
The annual percentage yield measures the total amount of interest paid on an account based
on the interest rate, and the frequency of compounding!,] ►and interest payments*.1 The
annual percentage yield is expressed as an annualized rate, based on a 365-day year.2 Part I
of this appendix discusses the annual percentage yield calculations for account disclosures
and advertisements, while Part II discusses annual percentage yield earned calculations for
periodic statements.
Part I. Annual percentage yield for account disclosures and advertising purposes
► A. General Rules <
In general, the annual percentage yield for account disclosures under §§ 230.4 and
230.5 of this part and for advertising under § 230.8 of this part is an annualized rate that
reflects the relationship between the amount of interest that would be earned by the consumer
for the term of the account ► (and the frequency of interest payments) * and the amount of
principal used to calculate that interest. [Special rules apply to accounts with tiered and
stepped interest rates. A. General Rules} The annual percentage yield shall be calculated by
the formulafr-s-* shown below. Institutions shall calculate the annual percentage yield based
on the actual number of days in the term of the account. For accounts without a stated
maturity date (such as a typical savings or transaction account), the calculation shall be based

1 The annual percentage yield reflects only interest and does not include the value of
any bonus (or other consideration worth $10 or less) that may be provided to the consumer to
open, maintain, increase or renew an account. Interest or other earnings are not to be
included in the annual percentage yield if such amounts are determined by circumstances that
may or may not occur in the future.
2 Institutions may calculate the annual percentage yield based on a 365-day or a 366day year in a leap year.

- 16on an assumed term of 365 days. [In determining the total interest figure to be used in the
formula,] Institutions shall assume that [all principal and interest remain on deposit for the
entire term and that no other transactions (deposits or withdrawals)] ►n o deposits* occur
during the term.[3] For time accounts that are offered in multiples of months, institutions
may base the number of days either on the actual number of days during the applicable
period, or the number of days that would occur for any actual sequence of that many
calendar months. If institutions choose to use the latter rule, they must use the same number
of days to calculate the dollar amount of interest earned on the account that is used in the
annual percentage yield form ulae* [(where "Interest" is divided by "Principal")]. ► I f
interest is credited-monthly, quarterly or semi-annually, institutions may base the number of
days on either the actual number of days for those intervals, or the following assumed
intervals: monthly, 30 days; quarterly, 91 days; and semi-annually, 182 days. If institutions
choose to use the latter rule, they must use the same number of days to calculate the dollar
amount of interest earned on the account that is used for the crediting interval. Institutions
may base the dollar amount of a deposit on either the actual amount of the deposit or an
assumed deposit of $1000.
1.

Formula for all accounts

The following formula may be used for all accounts. It shall be used for stepped-rate
accounts (and variable-rate accounts with an introductory premium or discount) where
interest is paid prior to the maturity of the account. The formula also shall be used for
accounts where interest is paid prior to the maturity of the account if interest is not
compounded daily. This formula reflects the specific frequency of interest payments to the
consumer.
Deposit = First payment/(l + APY/100)D5 ofdepo*
a'
ittodiyoff,r,tp* en 65
ym ,/3
-I- Succeeding payment/(l + APY/100)D,yofdepo,it,o,ucc“din8paym
eo,/365
+ ...
+ Final Payment/(1 + APY/100)D ofdcpos" * * of fm p* ^ 3 5
ay
°
il
6
"APY" is the annual percentage yield paid on the deposit.
"Deposit" is the initial deposit.
"First payment" is the amount of the first interest payment made during the
term of the account.

3[This assumption shall not be used if an institution requires, as a condition of the
account, that consumers withdraw interest during the term. In such a case, the interest (and
annual percentage yield calculation) shall reflect that requirement.]

- 17 "Succeeding payment" is the amount of each succeeding interest payment,
excluding the first and final payments, made during the term of the account.
"Final payment" is the amount of the final payment including principal made
at the end of the account.
"Day of deposit to day of first payment" is the number of days between the
day of the initial deposit and the first payment.
"Day of deposit to succeeding payment" is the number ofdays-between the
day of the initial deposit and each succeeding payment.
"Day of deposit to day of final payment" is the actual number of days in the
term of the account.
Examples:
(1) For a $1,000 two-year CD (with a 6.00% interest rate and a .01644% daily periodic
rate, and no compounding but semi-annual interest payments), an institution makes two
midyear interest payments of $29.92 on day 182 of each year (days 182 and 547) and two
interest payments of $30.08 at each year’s end (days 365 and 730). Using the formula
above, the annual percentage yield is 6.09%:
1.000 =
29.92/(1 + APY/100)1 2 6 + 30.08/(1 + APY/100)3 5 3 5
8 /3 5
676
+ 29.92/(1 + APY/100)5 7 3 5 + 1030.08/(1 + APY/100)7 0 3 5
476
376
Daily yield = .01619%
APY =
6.09%
(2)
For a $1,000 one-year CD (with a 6.00% interest rate and a .01644% daily periodic
rate, compounded semi-annually), an institution which allows the consumer to elect quarterly
interest payments assumes three quarterly interest payments of $14.96 at 91-day intervals
(days 91, 182 and 273), and a final payment of $1015.12 on day 365. Using the formula
above, the annual percentage yield for the quarterly payment option is 6.14%:
1.000 =
14.96/(1 + APY/100)91 + 14.96/(1 + APY/100)1 2 3 5
/365
876
+ 14.96/(1 + APY/100)2 3 3 5 + 1015.12/(1 -I- APY/100)3 5 3 5
776
676
Daily yield = .01632%
APY = 6.14%
2. Formula for certain accounts
The formula under this section I.A.2. may be used for accounts that make a single interest
payment at maturity. The formula may also be used for accounts that compound daily
regardless of when interest is credited, with one exception. This formula may not be used
for stepped-rate accounts and variable-rate accounts with an introductory premium or
discount that compound daily and pay interest prior to maturity. When using the formula,
institutions shall determine the total interest figure to be used in the formula by assuming that

- 18 all principal and interest remain on deposit for the entire term and that no other transactions
(deposits qt withdrawals) occur during the term. * The annual percentage yield is calculated
by use of the following [general] formula ("APY" is used for convenience in the formulas):
APY = 100 [(1 + (Interest/Principal))063^

ktem) - 1]

"Principal" is the amount of funds assumed to have been deposited at the beginning of
the account.
"Interest" is the total dollar amount of interest earned on the Principal for the term of
the account.
"Days in term" is the actual number of days in the term of theaccount.
When the "days in term" is 365 (that is, where the statedmaturity is365 days or where the
account does not have a stated maturity), the annual percentage yield can be calculated by
use of the following simple formula:
APY = 100 (Interest/Principal)
Examples:
(1) If an institution pays [$61.68] ► $61.83 ^ in interest for a 365-day year on $1,000
deposited into a NOW account ►(w ith a 6.00% interest rate and daily compounding)*, using
the [general] formula above, the annual percentage yield is [6.17] ►6 .1 8 * %:
APY = 100 [(1 + ([61.68] ► 61.83 * /1,000))(3 /3 5 -1]
65 6 )
APY = [6.17] ► 6rl8 * %.
Or, using the simple formula above (since, as an account without a stated term, the term is
deemed to be 365 days):
APY = 100 (61 .-1[7]► 8* / l ,000)
APY = 6.1[7]^8* %
(2)
If an institution [pays $30.37 in interest on] ►offers* a $1,000 six-month certificate
of deposit (where the six-month period used by the institution contains 182 days^, quarterly
interest payments are sent, and there is daily compounding at a 6.00% interest rate*), using
the [general] formula above, the annual percentage yield is 6.18%:
APY = 100 [(1 + (30.37/l,000))(3 /18 - 1]
65 2)
APY = 6.18%
B. Stepped-Rate Accounts (Different rates apply in succeeding periods.)
*

*

*

*

*

- 19Examples
(1)
If an institution offers a $1,000 6-month certificate of deposit on which it pays a
5.00% interest rate, compounded daily, for the first three months (which contain 91 days),
and a 5.50% interest rate, compounded daily, for the next three months (which contain 92
days), the total interest ►paid in a single payment at maturity* for six months is $26.68 and
using the [general] formula ►in section I.A.2. * above, the annual percentage yield is 5.39%:
APY = 100 [(1 + (26.68/l,000))< 6 /1 3 - 1]
35 8)
APY = 5.39%
(2)
If an institution offers a $1,000 two-year certificate of deposit on which it pays a
6.00% interest rate, compounded daily, for the first year, and a 6.50% interest rate,
compounded daily, for the next year, the total interest ►paid in a single payment at
maturity* is $133.13 and using the [general] formula ►in section I.A .2.* above, the annual
percentage yield is 6.45%:
APY = 100 [(1 + 133.13/1,000)(3 73 -1]
6V 0)
APY =6.45%
► (3) For a $1,000 two-year certificate of deposit (with an interest rate of 6.00% and a
daily periodic rate of .01644% the first year, and an interest rate of 6.50% and a daily
periodic rate of .01781% the second year, no compounding but semi-annual interest
payments), an institution makes two payments during the first year, a midyear interest
payment of $29.92 on day 182 and a yearend interest payment of $30.08 on day 365, and
two payments during the second year, a midyear interest payment of $32.41 on day 547 and
a final payment of $1032.59 on day 730. Using the formula in section I.A .I. above, the
annual percentage yield is 6.34%:
1,000 =
29.92/(1 + APY/100)1 2 3 5 + 30.08/(1 + APY/100)3 5 3 5
876
676
+ 32.41/(1 + APY/100)5 7 3 5 + 1032.59/(1 -I- APY/100)7 0 3 5
476
376
Daily yield = .01684%
APY = 6.34%*
C.
*

Variable-Rate Accounts
*

*

*

*

For example, [if] ►assume* an institution offers an account on which it pays ►quarterly
interest payments at* a 7.00% interest rate ►and a .01934% daily periodic rate*,
compounded daily, for the first three months (which, for example, contain 91 days), while
the variable interest rate that would have been in effect when the account was opened was
5.00% [, the total interest for] ►w ith a daily periodic rate of .01378%. For* a 365-day
year [for]►on* a $1,000 deposit [is $56.52] ►a n institution would make one quarterly
interest payment on day 91 of $17.60* [(based on 91 days at 7.00% ]►, two interest
payments of $12.54 on days 182 and 273,* [followed by 274 days at 5%)]^ and a final
payment of $1012.68 on day 365*. Using the [simple] formula ►in section I.A .I.* the
annual percentage yield is [5.65]► 5.66* %:

- 20 [APY
= 100 (56.52/1,000)
APY
= 5.65%]
► 1,000 = 17.60/(1 + APY/100)91/3 + 12.54/(1 + APY/100)1 2 3 5
6S
876
+ 12.54/(1 + APY/100)2 3 3 5 + 1012.68/(1 + APY/100)3 5 3 5
776
676
Daily yield = .01508%
APY
= 5.66%*

6. In Part 230, Appendix B, section B-l is amended by removing Model Clause B-l(h)(iii)
and redesignating Model Clause B-l(h)(iv) as Model Clause B-l(h)(iii), and by adding a
sentence to the end of Model Clause B-l(b)(i) to read as follows:
APPENDIX B - MODEL CLAUSES AND SAMPLE FORMS
B -l - MODEL CLAUSES FOR ACCOUNT DISCLOSURES
^

*

*

*

*

*

(b) Compounding and crediting
(i) Frequency
*

*

*

►
or
Interest for your account will be paid [by check/to another account] [(time period)]. *
* * * * *
7. In Part 230, Appendix B is amended by removing the last two sentences from the first
paragraph of Sample Form B-7 and by adding a new Sample Form B-7a to read as follows:
APPENDIX B - MODEL CLAUSES AND SAMPLE FORMS
* * * * *
B-7 - SAMPLE FORM (CERTIFICATE OF DEPOSIT)
XYZ SAVINGS BANK
1 YEAR CERTIFICATE OF DEPOSIT
Rate information
The interest rate for your account is 5.20 % with an annual percentage yield of 5.34 %.
You will be paid this rate until the maturity date of the certificate. Your certificate will
mature on September 30. 1993 . [The annual percentage yield assumes interest remains on
deposit until maturity. A withdrawal will reduce earnings.]

- 21 ► B-7a - SAMPLE FORM (CERTIFICATE OF DEPOSIT)
XYZ SAVINGS BANK
1 YEAR CERTIFICATE OF DEPOSIT
Rate information
The interest rate for your account is 5.00 % with an annual percentage yield of 5.12 %.
You will be paid this rate until the maturity date of the certificate. Your certificate will
mature on September 30. 1994 .
Interest for your account will be:
Compounded and credited to your account___ two times a year.
___ four times a year.
Paid to you
monthly
__four times a year

by check __ to another
account.

Interest begins to accrue on the business day you deposit any noncash item (for example,
checks).
Minimum balance requirements
You must deposit $1,000 to open this account.
You must maintain a minimum balance of $1,000 in your account every day to obtain the
annual percentage yield listed above.
Balance computation method
We use the daily balance method to calculate the interest on your account. This method
applies a daily periodic rate to the principal in the account each day.
Transaction limitations
After the account is opened, you may not make deposits into or withdrawals from the
account until the maturity date.
Earlv withdrawal penalty
If you withdraw any principal before the maturity date, a penalty equal to three months
interest will be charged to your account.

- 22 Renewal policy
This account will be automatically renewed at maturity. You have a grace period of ten (10)
calendar days after the maturity date to withdraw the funds without being charged a
penalty. «
*

*

*

*

*

Board of Governors of the Federal Reserve System, November 21, 1993.

(signed)

William W. Wiles

William W. Wiles
Secretary of the Board


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102