Compound Interest Rate Converter
Compare and convert interest rates between different compounding periods to make informed financial decisions
Input Parameters
Rate Comparison
Growth Comparison
Initial Investment
$10,000
Investment Period
10 years
Highest Return
Annual Compounding
Difference
$196 (1.2%)
Understanding Compounding Frequencies
Compound interest is the addition of interest to the principal sum of a loan or deposit, or in other words, interest on interest. The frequency of compounding has a significant effect on the total amount of interest earned.
Key Concepts:
- Nominal Interest Rate (NIR) – The stated annual interest rate without considering compounding within the year
- Effective Annual Rate (EAR) – The actual annual interest rate that accounts for compounding during the year
- Compounding Frequency – How often the interest is calculated and added to the principal balance
Why Compounding Frequency Matters:
The more frequently interest is compounded, the higher the effective annual rate will be. For example, a 5% nominal rate compounded quarterly will yield a higher return than the same rate compounded annually. This is because each interest payment is added to the principal, so future interest payments are calculated on a larger balance.
Formula for Conversion:
To convert between compounding frequencies, we use the formula:
Equivalent Rate = n × [(1 + r/m)^(m/n) – 1]
Where r is the nominal annual rate, m is the original compounding frequency, and n is the new compounding frequency.
“Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”
– Albert Einstein
This calculator provides estimates for educational purposes only. Actual investment returns may vary based on market conditions, fees, and other factors. Consider consulting a financial advisor before making investment decisions.