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Difference Of Monthly, Quarterly, Half-Yearly And Annual Compounding

May 13th, 2010 by

  • Ramesh is in possession of extra cash and he is planning to invest it. He enquired about the fixed deposit rates at various banks. He also came to know that different banks compound the investment in different times i.e. monthly, quarterly, half-yearly and annually. He could not understand the implications of compounding the investment in different times. So, he approached his friend Narendra, who is a financial analyst.

    Narendra started by giving an example of investment of Rs. 1000 for 5 years. He took the various interest rates and different compounding periods. After a simple analysis, he came up with the following table showing the value of the investment:

    Rates\Method Monthly Quarterly Half Yearly Annually
      (a)     (b)
    6% 1348.85 1346.86 1343.92 1338.23
    8% 1489.85 1485.95 1480.24 1469.33
    10% 1645.31 1638.62 1628.89 1610.51
    12% 1816.70 1806.11 1790.85 1762.34

    Table shows how an investment of Rs 1000 for a period of 5 years grows under different compounding methods. This table clearly shows that as the period of compounding increases from monthly to annual, the investment amount decreases for a particular interest rate. At an interest rate of 12 per cent, the amount becomes Rs 1762.34 under yearly compounding while the same amount grows to Rs 1816.70 under monthly compounding, a difference of Rs 54.36.

    Conclusion

    So, it is definitely better to go for investment where your money is compounded in shorter period than in longer ones.

    2 Comments

2 Responses to “Difference Of Monthly, Quarterly, Half-Yearly And Annual Compounding”

  1. Loan gets compounded annually or monthly?

  2. Nice example for non-finance background. Thanks

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