Periodic Interest Rate


DEFINITION of 'Periodic Interest Rate'

The interest rate charged on a loan or realized on an investment over a specific period of time. Most interest rates are quoted on an annual basis. If the interest on the loan or investment compounds more frequent than annually, the annual interest rate must be converted to a periodic interest rate where interest charged or realized over each compounding period can be calculated. This calculation is made by dividing the annual interest rate by the number of compounding periods.

BREAKING DOWN 'Periodic Interest Rate'

For example, the interest on a mortgage is calculated monthly. If the annual interest rate is 8%, the periodic interest rate used to calculate the interest charge due in any single month would be 0.08 / 12 = .00666 or 0.666%.

Keep in mind that the more frequently an investment compounds, the more quickly the principal grows. For example, let's say two options are available on an investment of $1,000.

Option 1 - Invest $1,000 at 8% compounded monthly.
Option 2 - Invest $1,000 at 8.125% compounded annually.

At the end of 10 years, Option 1 grows to $2,219.64. Option 2 grows to $2,184.04. Even though the interest rate on Option 2 is higher by 0.125%, the more frequent compounding of Option 1 (caused by the earning of interest on interest) yields a higher end amount.

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  1. What is the difference between APR and APY?

    APR stands for Annual Percentage Rate, which is the interest rate that is paid on an investment. APY, which stands for Annual ... Read Full Answer >>
  2. How is interest charged on most lines of credit?

    Lines of credit are flexible, direct loans between a financial institution, usually a bank, and an individual or business. ... Read Full Answer >>
  3. Do FHA loans have prepayment penalties?

    Unlike subprime mortgages issued by some conventional commercial lenders, Federal Housing Administration (FHA) loans do not ... Read Full Answer >>
  4. Can FHA loans be refinanced?

    Federal Housing Administration (FHA) loans can be refinanced in several ways. According to the U.S. Department of Housing ... Read Full Answer >>
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