# frequency of compounding

## Frequency of Compounding

The number of times that interest is calculated on a loan or other fixed-return investment in a given year. For example, if the frequency of compounding is three, interest is calculated three times per year. The higher the frequency of compounding, the greater return one will make (or one will spend) on the loan or other investment at the same interest rate. See also: Continuously Compounded Interest.

## frequency of compounding

The number of times interest is calculated and added to the sum of the principal and any interest added during a particular period (nearly always one year). More frequent compounding results in a more rapid buildup of funds. For example, $1,000 deposited at 12% compounded twice a year equals $1,000(1.06)(1.06), or $1,123.60 at the end of one year, while compounding four times a year results in $1,000(1.03)(1.03)(1.03)(1.03), or $1,125.51.

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