Posted by Dan - GA on July 14, 2003 at 21:37:03:

Matt:

Both of your examles are simple interest calculations. One with 12 fixed periods/year, the other with 12 variable periods/year. Compound interest “adds” interest daily (or whatever the comouding period is) and calculates the next periods interest using the new higher priciple balance.

Day 1 $100,000.00000 x .06/365=16.43835

Day 2 $100,016.43835 x .06/365=16.44111

Day 3 $100,032.87941 x .06/365=16.44376

etc… etc… etc…

The interest is rising about .003 per day. In a 30 day month, the last day will have about 10 cents more interest charged per day, or an average of 5 cents per day, $1.50 per month. So instead of 100,000x.06/365x30= $493.15, the interest paid or charged is $494.65 or an effective yeild of 494.65/30x365/100000=6.018%. The .018 is the value of compounding.