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.

RELATED TERMS
  1. Compound Interest

    Compound Interest is interest calculated on the initial principal ...
  2. Effective Annual Interest Rate

    Effective Annual Interest Rate is an investment's annual rate ...
  3. Periodic Interest Rate

    The interest rate charged on a loan or realized on an investment ...
  4. Continuous Compounding

    The process of earning interest on top of interest. The interest ...
  5. Compound Return

    The rate of return, usually expressed as a percentage, that represents ...
  6. Biotech Compound

    A chemical entity that forms the starting point in the drug development ...
Related Articles
  1. Investing

    How does Compound Interest Work?

    A quick way to understand the impact of compound interest is to ask yourself if you’d rather receive $100,000 a day for a month, or start with a penny on day one and double it every day for those ...
  2. Investing

    Accelerating Returns With Continuous Compounding

    Investopedia explains the natural log and exponential functions used to calculate this value.
  3. Investing

    Learn Simple And Compound Interest

    Interest is defined as the cost of borrowing money, and depending on how it is calculated, can be classified as simple interest or compound interest.
  4. Investing

    Overcoming Compounding's Dark Side

    Understanding how money is made and lost over time can help you improve your returns.
  5. Personal Finance

    How Interest Rates Work on Savings Accounts

    Here's what you need to know to grow your rainy-day fund.
  6. Investing

    The Difference Between Compounding Interest and Simple Interest

    Interest is the cost a borrower pays to use someone else’s money. Interest can be either simple or compounded.
  7. Investing

    The Effective Annual Interest Rate

    The effective annual interest rate is a way of restating the annual interest rate so that it takes into account the effects of compounding.
  8. Retirement

    Why Investors Should Care About Compound Interest

    Learn about compounding interest and how it impacts savings decisions, debt management, investment strategies and retirement planning.
  9. Investing

    Explaining Interest

    Interest is the price charged to borrow money, and is typically expressed as a percentage of the principal, or the amount loaned.
  10. Managing Wealth

    Dissecting the Simple Interest Formula

    Simple interest ignores the effect of compounding: it's only calculated on the principal amount. This makes it easier to calculate than compound interest.
RELATED FAQS
  1. What is the difference between continuous compounding and discrete compounding?

    Learn to differentiate between and calculate the continuous and discrete compounding formulas for interest-generating investments ... Read Answer >>
  2. What formula can I use to calculate interest on interest?

    Find out more about compounding interest, what it measures and how to calculate the amount of compound interest accrued using ... Read Answer >>
  3. How often is interest compounded?

    Understand what compound interest is and how the compounding of interest applies to the benefit of investors or creditors, ... Read Answer >>
  4. How do mutual funds compound interest?

    Learn how mutual funds can grow wealth over time through the magic of compound interest by reinvesting dividends back into ... Read Answer >>
  5. Other than my savings account, what other types of holdings compound my interest?

    Understand the benefits of compounding interest, and learn the types of investments that offer compounding in addition to ... Read Answer >>
Hot Definitions
  1. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  2. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  3. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
  4. Yuppie

    Yuppie is a slang term denoting the market segment of young urban professionals. A yuppie is often characterized by youth, ...
  5. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
  6. Four Percent Rule

    A rule of thumb used to determine the amount of funds to withdraw from a retirement account each year. The four percent rule ...
Trading Center