What it is:
Gross interest is the amount of interest an account or investment earns before deducting , fees or other charges. It is expressed as a percentage.
How it works (Example):
Let's assume you Savings Account" at Bank XYZ. The account advertises a 2% annual interest rate. You $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 on the interest (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 anthat net against the interest . Accordingly, investors should always consider account fees, and other costs when evaluating advertised interest rates or rates.