compounding frequency refers to This is a topic that many people are looking for. star-trek-voyager.net is a channel providing useful information about learning, life, digital marketing and online courses …. it will help you have an overview and solid multi-faceted knowledge . Today, star-trek-voyager.net would like to introduce to you 03 – Varying the Compounding Frequency. Following along are instructions in the video below:
“Often you re going to have a different compounding frequency other than just annual annual annual means once per year. The interest is calculated ree calculated once per year. But have various other compounding frequencies that we can use we have semi annually. Which means two times per year.
The interest is calculated two times for every year that the investment exists. Quarterly means four times a year monthly is 12 times a year 7 monthly is 24 times a year. Bi weekly is 26 times a year weekly is 52 times a year and daily is 365 times a year bi weekly is a very popular compounding frequency for mortgages..
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So if and when the time comes that you will be buying or getting a house and nia mortgage. Bi weekly is attractive because you have 26 payments in a year rather than 24. Which means you re able to pay down your principal faster which means in the end you will be paying less interest over the life of your mortgage. 365 daily interest daily compounding frequency is very typical for credit cards so this is a reason why you should be paying off credit card balances as quickly as possible because the interest is being recalculated everyday that you haven t paid off your full balance.
So let s look at an example so now we re going to use the same example as before however we re going to do it as quarterly instead of monthly instead of annually. So this word here should be monthly change that to a monthly please okay so alexis receives a thousand dollars she invested for five years three percent compounded monthly. Okay now you may also see a a when you talk about annually the a means per annum or per year okay so since it s something other than annual..
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We have to adjust the interest rate and adjust the term so for the interest rate. We re going to take the interest rate. We re going to divide it by 4. So we re going to divide by the compounding frequency so that gives us point 0 0.
75 is our new interest value and our new period is going to be the existing period five years x four. So i multiply the term by the compounding frequency. I divide the interest rate by the compounding frequency..
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So now i will plug this into the formula. So i m plugging my new interest rate in here. And i m plugging my new term in there. And that works out to 1161 dollars and 18 cents.
Now how much interested shared again we just subtract. The principal from the final amount that gives me 161 dollars and 18 cents. Let s compare that to the 159 dollars and 27 cents..
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We got from compounding once a year annually or the hundred and fifty dollars from simple interest. So the more frequent you comp more frequently you compound an investment the more frequently you calculate the interest which means the ” ..
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