Discrete Compounding


DEFINITION of 'Discrete Compounding'

Discrete compounding refers to the method by which interest is calculated and added to the principal at certain set points in time. For example, interest may be compounded daily, weekly, monthly or even yearly. Discrete compounding is the opposite of continuous compounding, which uses a formula to compute interest as if it were being constantly calculated and added to principal.

BREAKING DOWN 'Discrete Compounding'

The frequency with which interest is compounded has a slight effect on an investor's effective annual yield. For example, suppose you deposit $100 in an account which earns 5% interest annually. If the bank compounds interest annually, you will have $105 at the end of the year. If, on the other hand, the bank compounds interest daily, you will have $105.13 at the end of the year.

  1. Compound Interest

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  2. Principal

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  3. Effective Annual Interest Rate

    Effective Annual Interest Rate is an investment's annual rate ...
  4. Compounding

    The ability of an asset to generate earnings, which are then ...
  5. Annual Percentage Yield - APY

    The effective annual rate of return taking into account the effect ...
  6. Continuous Compounding

    The process of earning interest on top of interest. The interest ...
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