DEFINITION
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.INVESTOPEDIA EXPLAINS
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.
RELATED TERMS

Compound Interest
Interest calculated on the initial principal and also on the accumulated interest ... 
Nominal Interest Rate
The interest rate before taking inflation into account. The equation that links ... 
Gross Interest
The annual rate of interest to be paid on an investment, security or deposit ... 
Arrears
Overdue debt, liability or obligation. An account is said to be "in arrears" ... 
Present Value Interest Factor Of ...
A factor which can be used to calculate the present value of a series of annuities. ... 
Interest Rate
The amount charged, expressed as a percentage of principal, by a lender to a ... 
Stated Annual Interest Rate
The return on an investment that is expressed as a peryear percentage, and ... 
Annualized Rate
A rate of return for a given period that is less than one year, but that is ... 
Annual Percentage Rate  APR
The annual rate that is charged for borrowing (or made by investing), expressed ... 
Annual Percentage Yield  APY
The effective annual rate of return taking into account the effect of compounding ...
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