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:

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.