Rate mechanics
What compounding frequency changes
Compounding frequency is how often earned interest is added to the balance. Once added, that interest can participate in later growth periods.
Annual, monthly, and daily comparison
This example starts with $10,000, assumes a fixed 5% nominal annual rate for 10 years, and makes no additional deposits.
| Compounding | Periods per year | Ending balance | Projected interest |
|---|---|---|---|
| Annual | 1 | $16,288.95 | $6,288.95 |
| Monthly | 12 | $16,470.09 | $6,470.09 |
| Daily | 365 | $16,486.65 | $6,486.65 |
More frequent compounding produces a higher result when the nominal rate and every other assumption stay fixed. The increase becomes smaller as the frequency rises: in this example, moving from monthly to daily changes the ending balance far less than moving from annual to monthly.
Nominal rate and effective annual yield
A nominal annual rate states the rate before the effect of within-year compounding. If the nominal rate is r and interest compounds n times per year, the effective annual growth is (1 + r ÷ n)^n − 1. At a 5% nominal rate, monthly compounding produces an effective annual rate of about 5.12%.
When comparing real deposit accounts, use the institution's disclosed annual percentage yield and account terms. The CFPB's deposit-account disclosure rules recognize annual, semiannual, quarterly, monthly, daily, continuous, and other compounding or crediting schedules.
Compounding and crediting may be described separately
An account can calculate interest using daily balances but credit it on another schedule. Withdrawals, minimum-balance rules, fees, and the exact number of days can also affect real interest. A general calculator simplifies those product-specific rules into a fixed schedule.
Read the account disclosure for an actual product. For educational comparisons, keep the rate, time, and deposits fixed and change only the compounding frequency.