Periodic Interest Rate

AAA

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.

INVESTOPEDIA EXPLAINS '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.

RELATED TERMS
  1. Compound Interest

    Interest calculated on the initial principal and also on the ...
  2. Nominal Interest Rate

    The interest rate before taking inflation into account. The equation ...
  3. Gross Interest

    The annual rate of interest to be paid on an investment, security ...
  4. Arrears

    Overdue debt, liability or obligation. An account is said to ...
  5. Present Value Interest Factor Of ...

    A factor which can be used to calculate the present value of ...
  6. Annual Percentage Rate - APR

    The annual rate that is charged for borrowing (or made by investing), ...
RELATED FAQS
  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. What are the main risks associated with trading derivatives?

    The primary risks associated with trading derivatives are market, counterparty, liquidity and interconnection risks. Derivatives ... Read Full Answer >>
  4. How can an investor profit from a fall in the utilities sector?

    The utilities sector exhibits a high degree of stability compared to the broader market. This makes it best-suited for buy-and-hold ... Read Full Answer >>
  5. What is the difference between derivatives and options?

    Options are one category of derivatives. Other types of derivatives include futures contracts, swaps and forward contracts. ... Read Full Answer >>
  6. How are rights distributed in a rights offering?

    In a rights offering, rights are distributed to shareholders based on the number of shares they already own. What Is a Rights ... Read Full Answer >>
Related Articles
  1. Retirement

    Top 4 Reasons To Save For Retirement Now

    No more excuses. Make sure you are financially secure and independent for your golden years.
  2. Credit & Loans

    How Mortgage Refinancing Affects Your Net Worth

    Find out how to determine whether refinancing will put you ahead or even more behind.
  3. Credit & Loans

    Take Control Of Your Credit Cards

    The plastic in your wallet doesn't have to hurt your finances. Learn how to manage it responsibly.
  4. Investing Basics

    Understanding The Time Value Of Money

    Find out why time really is money by learning to calculate present and future value.
  5. Home & Auto

    The Benefits Of Mortgage Repayment

    Buying a home may be the biggest debt you'll ever incur. Learn why you should retire it sooner, rather than later.
  6. Budgeting

    Teaching Your Child To Be Financially Savvy

    If you start today, you can set your kids up for a lifetime of smart money management.
  7. Investing Basics

    Explaining Gamma

    Gamma is a measurement of how fast the delta of an option’s price changes after a 1-point movement in the underlying security.
  8. Home & Auto

    How the Fed Affects Reverse Mortgages

    An in depth look at how the Federal Reserve affects reverse mortgages.
  9. Investing

    Where Are Real Estate Stocks Heading?

    We summarize five economic reports that investors should monitor monthly to keep them informed of where real estate and its related stocks are heading.
  10. Economics

    Will the Selloff in China Hurt the Global Economy?

    Though China is the world’s second largest economy, its volatility in the stock market is unlikely to have an impact on the global or Chinese economy.

You May Also Like

Hot Definitions
  1. Investopedia

    One of the best-known sources of financial information on the internet. Investopedia is a resource for investors, consumers ...
  2. Unfair Claims Practice

    The improper avoidance of a claim by an insurer or an attempt to reduce the size of the claim. By engaging in unfair claims ...
  3. Killer Bees

    An individual or firm that helps a company fend off a takeover attempt. A killer bee uses defensive strategies to keep an ...
  4. Sin Tax

    A state-sponsored tax that is added to products or services that are seen as vices, such as alcohol, tobacco and gambling. ...
  5. Grandfathered Activities

    Nonbank activities, some of which would normally not be permissible for bank holding companies and foreign banks in the United ...
  6. Touchline

    The highest price that a buyer of a particular security is willing to pay and the lowest price at which a seller is willing ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!