Contents of Intrayear Compounding

Intrayear Compounding

To adjust for intrayear compounding, an interest rate per compounding period must be found as well as the total number of compounding periods

interest rate per compounding period is found by taking the annual rate and dividing it by the number of times per year the cash flows are compounded
total number of compounding periods is found by multiplying the number of years by the number of times per year cash flows are compounded

Lecture Notes

In all of the previous examples, the interest was compounded annually, but we can also compound the interest monthly or semiannually, quarterly. The examples on the next slide should help illustrate how to adjust our formula for intra-year compounding. The rules as to how to do that are provided here.