Making Your Savings Decisions

Compounding Periods

Interest can be compounded annually, semi-annually, quarterly, monthly, daily, or on any other basis.[4] Compounding occurs when the interest is added to the existing balance and begins to earn additional interest.

If you have an account that pays 12 percent interest per year, do you receive a single 12 percent interest payment each year?

• Maybe, maybe not.
• What if you are paid quarterly? You would get four 3 percent interest payments.
• What if you receive interest once per month?
• What if you receive interest daily?

Interest per period = annual interest rate/frequency

Table 9 shows the interest paid per period if the annual interest rate is 12 percent.