When Interest is Compounded Quarterly

The word compounding refers to the method of getting interested not only in the principal amount but also in the rate of interest earned from previous years.

In the compound interest, the interest is compounded quarterly which means that the principal amount is compounded four times a year. However, this kind of process is called interest on interest, as it is calculated both on the principal as well as the interest in previous years. This assignment focuses on the matter, of the rate of interest being compounded quarterly which means the amount is compounded four times in a whole year. Also, this study has focused on the comparison between simple and compound interest, and however, it has been stated which is best for their respective purpose.

Simple & Compound Interest

The method of simple interest is a comparatively quick and easy method to calculate the charge of interest on a loan or deposit. As per the method of simple interest, the rate is calculated by multiplying the daily rate of interest by the amount of principal and the period. However, interest is a simple method in which the rate of interest is estimated based on the total principal amount or the deposited amount in a savings account. This method is more friendly for the creditor as they have to pay only the interest on the total amount of principal. Also, the method is beneficial for the borrowers, as they do not have to pay interest on the interest of previous years. The method of simple interest is beneficial for the consumers who pay their loans according to the time or on the first of the month. Simple interest is applicable for some specific purpose such as auto loan as well as any personal loan purpose. The formula of simple interest is = P*I*N, where P stands for the amount of total principal, I stands for the rate of daily interest, and N stands for the interval days between payments.

As per the typical definition of compound interest, this interest is added to the sum of the principal amount of loan or any deposit, and this method is also known as the interest on interest. However, this process is known as the standard method of interest in economics and finance. One of the great advantages of this method, it helps to grow any funds or wealth comparatively faster than the simple interest method. However, this method is very much beneficial for the business investors, as they get more interest from their deposited amount. Depending on the method of calculating the rate of interest, the simple interest process is very easy rather than the compound interest. But in the case of investing, the compound interest method is best as it helps to grow the amount at a faster rate. The standard formula of compound interest is , CI= [P(1+i/n) nt – P], where P refers to the total amount of principal, i means the rate of interest, n strands for the period of compounding the amount, and t is the number of time period elapsed. In the case of yearly compounded interest, the amount is compounded twice in a year, and in the case of quarterly compounded rate, the amount is compounded quarterly in a year.

When Interest is compounded Quarterly

As per the method of compound interest when the rate of interest is compounded quarterly, it means that there are four conversion periods in a whole year and the rate of interest for a quarter is calculated as one-fourth of the rate of the annual year. The quarterly compound interest rate refers to the total principal amount compounded four times in a complete year and as per the standard formula of the compound interest, the ‘n’ i.e. the period is let as 4. As per the strategy of compound interest, continuous compounding is more beneficial as the earned interest can be reinvested after a specific period, and however, the investors can enjoy the continuous growth method of their wealth of funds rather than the monthly or quarterly compound method.

Conclusion

From doing the overall assignment based on simple and compound interest, it can be said that the simple interest method is more fruitful for any case of personal loan. The compound interest is more complex both in understanding and calculating, but it is more beneficial for the investors as it helps to grow the funds at a faster rate. Especially in the case of quarterly compound interest, the investors get more interest rather than the annually compounding method. As there are four quarters in a year, in which the money can be compounded, thus it helps the investors with higher future values of reinvestment.