Discrete Compounding

AAA

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.

INVESTOPEDIA EXPLAINS '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

    Interest calculated on the initial principal and also on the ...
  2. Continuous Compounding

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

    1. The amount borrowed or the amount still owed on a loan, separate ...
  4. Effective Annual Interest Rate

    An investment's annual rate of interest when compounding occurs ...
  5. Stated Annual Interest Rate

    The return on an investment that is expressed as a per-year percentage, ...
  6. Compounding

    The ability of an asset to generate earnings, which are then ...
Related Articles
  1. Top 4 Reasons To Save For Retirement ...
    Retirement

    Top 4 Reasons To Save For Retirement ...

  2. Accelerating Returns With Continuous ...
    Bonds & Fixed Income

    Accelerating Returns With Continuous ...

  3. Understanding The Time Value Of Money
    Investing Basics

    Understanding The Time Value Of Money

  4. Overcoming Compounding's Dark Side
    Investing Basics

    Overcoming Compounding's Dark Side

comments powered by Disqus
Hot Definitions
  1. 80-10-10 Mortgage

    A mortgage transaction in which a first and second mortgage are simultaneously originated. The first position lien has an ...
  2. Passive ETF

    One of two types of exchange-traded funds (ETFs) available for investors. Passive ETFs are index funds that track a specific ...
  3. Walras' Law

    An economics law that suggests that the existence of excess supply in one market must be matched by excess demand in another ...
  4. Market Segmentation

    A marketing term referring to the aggregating of prospective buyers into groups (segments) that have common needs and will ...
  5. Effective Annual Interest Rate

    An investment's annual rate of interest when compounding occurs more often than once a year. Calculated as the following: ...
  6. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
Trading Center