# 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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A longer tenure, coupled with higher frequency of compounding ( quarterly, halfyearly), can work magic.
The genesis of the problem of selecting the frequency of discounting is not with the timing of the rent payment but with selecting the frequency of compounding of interest.
Within the process of income valuation analysis, the appraiser must select the frequency of compounding of interest in order to compute present value factors for income capitalization and discounting.
Based on this understanding of terms, the conclusion of frequency of compounding of interest may be derived directly from how frequently payments are made ("frequency of payment").
For certain types of income properties, if the market is to be mirrored precisely in terms of the pattern of compounding and discounting that should be applied to reflect the pattern of receipt of income and disbursement of expenses, the frequency of compounding of interest would be computed on a daily basis with BOP frequency of discounting.
However, in other forms of yield capitalization, such as DCF analysis, the monthly frequency of compounding of interest and BOP frequency of discounting broadens the spreadsheet, often to such enormous proportions that many columns of tabular computations are required.
If the frequency of compounding selected is, say, monthly, but the NOI is essentially transacted on the 15th of each month, what frequency of discounting would be more appropriate than MP?

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