The number of compounding periods in one year is called compounding frequency. The compounding frequency affects both the present and future values of cash flows.

An investor can invest money with a particular bank and earn a stated interest rate of 6.60%; however, interest will be compounded quarterly. What are the nominal (or stated), periodic, and effective interest rates for this investment opportunity?

Interest Rates
Nominal rate
Periodic rate
Effective annual rate

Darnell needs a loan and is speaking to several lending agencies about their interest rates and loan terms. He particularly likes his local bank because he is being offered a nominal rate of 6.00%. However, since the bank is compounding its interest bimonthly (every two months), the loan will impose an effective interest rate of on his loan.

Suppose you decide to deposit $11,000 into a savings account that pays a nominal rate of 7.80%, but interest is compounded daily. Based on a 365-day year, how much would you have in your account after six months? (Hint: To calculate the number of days, divide the number of months by 12 and multiply by 365.)

$11,209.30

$11,323.68

$11,438.06

$11,666.82