InvestorQ : Can you explain how the value increases as the frequency of compounding increases?
Abhi Yadav made post

Can you explain how the value increases as the frequency of compounding increases?

Answer
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Abhisha Yadav answered.
1 year ago


As the compounding frequency increases, the simple interest earned during a given period remains fixed, but the compound interest increases. The more frequently you calculate interest, the more it compounds and builds a bigger corpus.

For example, with quarterly compounding, the investor in the previous example will receive 1% every three months; at the end of the year the investor will have a balance of:

Rs.1,000 (1 + 0.01)(1 + 0.01) (1 + 0.01)(1 + 0.01) = Rs.1,000(1 + 0.01)4 = Rs.1,040.60

In this case, the total interest is Rs.40.60. Of this:

Rs.40 is simple interest (interest on principal) Rs.0.60 is compound interest (interest on interest)

This demonstrates an important result: as the compounding frequency increases, the future value of a sum increases.