Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Gross Interest

What it is:

Gross interest is the amount of interest an account or investment earns before deducting taxes, fees or other charges. It is expressed as a percentage.

How it works (Example):

Let's assume you open a "Super Saver Savings Account" at Bank XYZ. The account advertises a 2% annual interest rate. You deposit $10,000 into the account, and after a month the bank pays you 1/12 of 2% on that $10,000, for a gross interest payment of $16.67. However, the monthly fee for maintaining the account is $5 and you have to pay a 28% federal income tax and a 5% state income tax on the interest income (which costs another $5.50), so the net interest is actually $6.17.
 

Why it Matters:

Gross interest can be misleading because it does not include other costs associated with owning an investment that net against the interest income. Accordingly, investors should always consider account fees, taxes and other costs when evaluating advertised interest rates or bond coupon rates.

Related Terms View All
  • Auction Market
    Though most of the trading is done via computer, auction markets can also be operated via...
  • Best Execution
    Let's assume you place an order to buy 100 shares of Company XYZ stock. The current quote...
  • Book-Entry Savings Bond
    Savings bonds are bonds issued by the U.S. government at face values ranging from $50 to...
  • Break-Even Point
    The basic idea behind break-even point is to calculate the point at which revenues begin...
  • Calendar Year
    If Company XYZ starts its fiscal year on January 1 and ends its fiscal year on December...