Compounding Periods Per Year Definition
The compounding periods per year definition is the number of times that interest is calculated on a loan or investment over the course of a year. The higher the number of compounding periods, the more interest that will accrue on the loan or investment. For example, if a loan has a stated interest rate of 6% and is compounded monthly, the annual percentage rate (APR) would be 6.17%. However, if that same loan was compounded daily, the APR would be 6.38%.
It’s important to understand how compounding works because it can have a significant impact on your overall return. The more frequently interest is compounded, the greater your return will be. This is why it’s important to choose an investment or savings account with a high compounding frequency.
Compounding periods are typically expressed as either daily, weekly, monthly, quarterly, semi-annually, or annually. The most common compounding period is monthly. When choosing an investment or savings account, make sure to check the compounding period so you can maximize your return.
