How often is interest compounded?
Interest can be compounded on any given frequency schedule. Common interest compounding time frames are daily, monthly, semi-annually and annually. There are typical compounding time frames for various financial instruments.
Compound interest is interest money earned that is added to the principal balance of either an investment, such as a passbook savings account or a certificate of deposit (CD), or of a loan, such as a mortgage, home equity loan or credit card account. Compounding refers to the fact that additional interest is earned on the new balance that represents the principal, or original, balance plus the interest that has been credited to the balance.
There are standard compounding frequency schedules that are usually applied to specific financial instruments. The commonly used compounding schedule for a savings account at a bank is daily. For a CD. typical compounding frequency schedules are daily, monthly or semi-annually. For
home mortgage loans, home equity loans, personal business loans or credit card accounts, the most commonly applied compounding schedule is monthly. There can also be variations in the time frame in which the accrued interest is actually credited to the existing balance. Interest on an account may be compounded daily but only credited monthly. It is only when the interest is actually credited, added to the existing balance, that it begins to earn additional interest in the account.
More frequent compounding of interest is beneficial to the investor or creditor. If an investor is earning compound interest on an investment, he earns more in interest the more frequently compounding occurs. For a borrower, the opposite is true. More frequent compounding means that the borrower pays a higher total amount to retire the loan or credit account, whereas less frequent compounding results in paying a lower total amount.Source: www.investopedia.com