Non-annual compounding: See Section 5-15 for formulas and examples

So far, we have focused on annual compounding. What about compounding that is not annual. Call "m" the compounding frequency each year.

semi annual (m=2)

quarterly (m=4)

monthly (m=12)

daily (m=365)

Whenever payments occur more than once a year, you must make two conversions:

1. (1)Convert the stated interest rate into a periodic rate. - In finance, interest rates are always quoted on an annual basis (this is called the APR)
2. (2)Convert the number of years into number of periods. - It is common to communicate in terms of years, but what we are interested is number of pay periods

Here is an example: if m=12, then we need to know how much interest is paid each month and also how many months the interest is paid.

Consider an investment that pays interest monthly for 8 years with an annual interest rate of 7%. Which of the following are true?

		N = 8 years / 12 months = 66.67 periods I/Y = 7% * 12 months = 8.4% monthly interest rate
		N = 8 years / 12 months = 66.67 periods I/Y = 7% / 12 months = 5.833% monthly interest rate
		N = 8 years * 12 months = 96 periods I/Y = 7% * 12 months = 8.4% monthly interest rate
		N = 8 years * 12 months = 96 periods I/Y = 7% / 12 months = 5.833% monthly interest rate