The compounding frequency is the number of times per year (or rarely, another unit of time) the accumulated interest is paid out, or capitalized (credited to the account), on a regular basis. The simple annual interest rate is also known as the nominal interest rate (not to be confused with the interest rate not adjusted for inflation, which goes by the same name). The simple annual interest rate is the interest amount per period, multiplied by the number of periods per year. Compound interest is standard in finance and economics.Ĭompound interest is contrasted with simple interest, where previously accumulated interest is not added to the principal amount of the current period, so there is no compounding.
It is the result of reinvesting interest, or adding it to the loaned capital rather than paying it out, or requiring payment from borrower, so that interest in the next period is then earned on the principal sum plus previously accumulated interest. Compound interest is the addition of interest to the principal sum of a loan or deposit, or in other words, interest on principal plus interest.
