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F ederal reserve Bank DALLAS. TEXA S of Dallas 75222 C ircu lar No. 79-45 March 9, 1979 REGULATION Q— INTEREST ON DEPOSITS M oney-Market Certificates: Prohibition of Compounding, Limitation of Maximum Rate of interest, and A dvertising Changes TO ALL MEMBER BANKS AND OTHERS CONCERNED IN THE ELEVENTH FEDERAL RESERVE DISTRICT: On March 8, 1979, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National C redit Union Adm inistration, and the Federal Home Loan Bank Board announced a change in the rules under which financial institutions issue six-month "money-market" certificates of deposit. The changes, which w ill go into effect March 15, 1979, w ill: 1. Prohibit the use of compounding on money-market certificates issued on or after March 15, 1979 by all financial institutions. 2. Lim it the annual rate of retu rn that th rift institutions may pay on such certificates to the discount rate on the most recently issued six-m onth treasury b ill, when such discount rate is 9 percent or h ig h e r. T h rift institutions could continue to offer the certificate at 1 /4 percent above the discount rate when the ceiling rate is 8 -3 /4 percent or less. However, th eir ceiling rate would be limited to a maximum 9 percent when the discount rate is between 8 -3 /4 and 9 percent. T h us, when the discount rate is 9 percent or higher, th rift institu tions would be limited to the same ceiling rate as commercial banks. Only the prohibition on compounding directly affects commercial banks as the maximum annual rate they may pay on money-market certificates does not change. Under Regulation Q, the formula for computation of simple interest is A = P (1 + RT) where "A" is the final amount, "P" is the amount on which interest is computed, "R" is the annual rate of simple interest and "T" is the time period. The regulation also authorizes the use of 360 or 365 (or 366 in a leap year) as the denominator of a fraction in which the numerator Is Banks and others are encouraged to use the following to ll-fre e incoming WATS numbers in contacting this Bank: 1-800-492-4403 (intrastate) and 1-800-527-4970 (interstate). For ca lls placed locally, please use 651 plus the extension referred to above. This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) - 2the actual number of days the deposit earns interest. In the case of a moneymarket certificate, the numerator w ill be 182 days. Th us, for a $10,000 money-market certificate issued on or after March 15 at 9 percent annual interest the interest paid should be computed as follows: A = 1 0 ,0 0 0 (1 + (.0 9 ) (182)) 360 = 10,455.00 OR A = 1 0 ,0 0 0 (1 + (.0 9 ) (182)) 365 = 1 0 ,4 4 8 .7 7 Member banks should take immediate steps to see that the simple Interest rate formula is followed for all money-market certificates issued on or after March 15, 1979. Under the new ru le s , institutions may advertise an annual effective rate of interest for money-market certificates based upon reinvestment after six months of both principal and interest, if the advertisements comply fully with guidelines that were previously issued. Advertisements must also state that federal regulations proh ibit compounding of interest. Member banks should take immediate steps to see that advertisements for money-market certificates issued on or after March 15 contain this statement. Appropriate changes to relevant sections of Regulation Q to incorporate the above changes w ill be furnished shortly. Questions on the changes should be directed to our Consumer A ffairs Section, E xt. 6171. Sincerely yours, Ernest T . Baughman President
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