Compound Interest

FAIRWINDS Credit Union uses compound interest to calculate the dividends our members earn on their deposits. When the compound interest calculation is used, interest is calculated on the original principal plus all interest accrued to that point in time. Since interest is paid on interest as well as on the amount borrowed, the effective interest rate is greater than the nominal interest rate. The compound interest rate method is often used by banks and savings institutions in determining interest they pay on savings deposits "loaned" to the institutions by the depositors. The more often interest is compounded within a particular time period, the greater will be the effective rate of interest. In a year, a 5 percent nominal annual rate of interest compounded four times (quarterly) results in an effective annual rate of 5.0945 percent; compounded 12 times (monthly), 5.1162 percent; and compounded 365 times (daily), 5.1267 percent. When the interval of time between compoundings approaches zero (even shorter than a second), then the method is known as continuous compounding. Five percent continuously compounded for one year will result in an effective annual rate of 5.1271 percent.

The interest calculators can be used to calculate yearly or daily interest.