## How Does Compound Frequency Affect Return on Investments (ROI)?

Interest & reward rates can be shown as APR or APY and compounding frequency can be by the minute to the year. But how do they affect your return on investment? Let’s find out…

This question is extremely important when comparing different investment and passive income opportunities. **Different companies and platforms publish interest rates using different metrics, so it is imperative that you understand the differences**. Different metrics affect ROI differently.

#### How Frequency of Compounding Affects APR ROI (Return on Investment)

In this example, we will take a look at the Annual Percentage Rate (**APR**) return on investment (**ROI**) with **daily, weekly, monthly, quarterly and yearly compounding frequency**. Quite simply, the compounding frequency is **how frequently you’re adding interest to the principal** which in turn earns more interest with time. You can **click on the below chart** for a full-sized version for better readability.

##### Finding #1

**If we use a consistent 10% APR for all compound frequencies, the corresponding APY rates change**. In summary, the 10% APY is equal to:

- 10.5156% APY for daily compounding
- 10.5065% APY for weekly compound frequency
- 10.4713% APY for monthly compounding
- 10.3813% APY for quarterly compound frequency and of course,
- 10.00% APY for yearly

##### Finding #2

**The shorter the compounding frequency** (i.e. daily versus quarterly), **the higher the interest or rewards earned**. The easiest way for us to understand this is to compare the **daily **compounding frequency ROI to the other frequencies. As you can see in the chart for the 10 year term, the daily ROI is:

- 0.08% higher than the weekly compound frequency ROI
- 0.40% higher than the monthly ROI
- 1.22% higher than the quarterly ROI and
- 4.79% higher than the yearly compound frequency ROI

##### Finding #3

**The longer the term** (i.e. number of years invested), **the higher the rate of ROI increase per year**. Not only are the returns on investment generally higher, but the rate of ROI increase goes up with longer terms. This makes sense as each time you add interest to the principal, your investment that earns rewards is also higher. The more compounds over longer periods means more principal and therefore, higher rates of return.

**Please scroll below for all the data in HTML tables**.

Click here to find out the differences between APR vs APY.

#### How Compounding Frequency Affects Posted APY ROI (Return on Investment)

On the other hand, does the frequency of compounding affect the Annual Percentage Yield (**APY**) return on investment (**ROI**)? We take a look at the same **daily, weekly, monthly, quarterly and yearly compounding frequencies**. Unlike APR return on investments, the **ROI for APY is not affected by the frequency of compounding**. You don’t earn more by compounding faster if the published APY rate is the same. You can **click on the below chart** for a full-sized version for better readability.

#### Finding #4

**If we use a consistent 10% APY for all compound frequencies, the corresponding APR rates change**. In summary, the 10% APY is equal to:

- 9.5323% APR for daily compounding
- 9.5398% APR for weekly compound frequency
- 9.569% APR for monthly compounding
- 9.6455% APR for quarterly compound frequency
- 10.00% APR for yearly

#### Finding #5

**Changing the compound frequency does not affect your return on investment if the APY stays consistent**. For example, you’ll see in the chart that the ROI is the same for all 5 year investments regardless of compound frequency. This is the definition of APY which is ‘Annual Percentage Yield’. That’s why the corresponding APR rates for each frequency is different.

#### In Summary

It’s always important to do your due diligence and fully understand how estimated returns are being portrayed. APR and APY are different metrics and are calculated differently. That combined with different compound frequencies give you varying rates of return and ultimately different ROI. This is accentuated even further when compounding over longer periods of time, as interest is being added to your prinipal and start earning more interest earlier. We hope you enjoyed this explanation.

#### The Data (for APR)

##### 1 Year Term @ 10% APR

CompoundFrequency | APY | InitialInvestment | Interest | FinalBalance |

Daily | 10.5156% | $1,000.00 | $105.16 | $1,105.16 |

Weekly | 10.5065% | $1,000.00 | $105.07 | $1,105.07 |

Monthly | 10.4713% | $1,000.00 | $104.71 | $1,104.71 |

Quarterly | 10.3813% | $1,000.00 | $103.81 | $1,103.81 |

Yearly | 10.00% | $1,000.00 | $100.00 | $1,100.00 |

Some notable differences in ROI include:

- daily compounding gives you 0.045% more than monthly
- weekly compounding gives you 0.036% more than monthly
- monthly compound frequency gives you 0.471% more than yearly
- daily compound frequency gives you 0.516% more than yearly

##### 2 Year Term @ 10% APR

CompoundFrequency | APY | InitialInvestment | Interest | FinalBalance |

Daily | 10.5156% | $1,000.00 | $221.37 | $1,221.37 |

Weekly | 10.5065% | $1,000.00 | $221.17 | $1,221.17 |

Monthly | 10.4713% | $1,000.00 | $220.39 | $1,220.39 |

Quarterly | 10.3813% | $1,000.00 | $218.40 | $1,218.40 |

Yearly | 10.00% | $1,000.00 | $210.00 | $1,210.00 |

Some notable differences in ROI include:

- daily compounding gives you 0.098% more than monthly
- weekly compounding gives you 0.078% more than monthly
- monthly compound frequency gives you 1.039% more than yearly
- daily compound frequency gives you 1.137% more than yearly

##### 5 Year Term @ 10% APR

CompoundFrequency | APY | InitialInvestment | Interest | FinalBalance |

Daily | 10.5156% | $1,000.00 | $648.61 | $1,648.61 |

Weekly | 10.5065% | $1,000.00 | $647.93 | $1,647.93 |

Monthly | 10.4713% | $1,000.00 | $645.31 | $1,645.31 |

Quarterly | 10.3813% | $1,000.00 | $638.62 | $1,638.62 |

Yearly | 10.00% | $1,000.00 | $610.51 | $1,610.51 |

Some notable differences in ROI include:

- daily compounding gives you 0.33% more than monthly
- weekly compounding gives you 0.262% more than monthly
- monthly compound frequency gives you 3.48% more than yearly
- daily compound frequency gives you 3.81% more than yearly

##### 10 Year Term @ 10% APR

CompoundFrequency | APY | InitialInvestment | Interest | FinalBalance |

Daily | 10.5156% | $1,000.00 | $1,717.91 | $2,717.91 |

Weekly | 10.5065% | $1,000.00 | $1,715.68 | $2,715.68 |

Monthly | 10.4713% | $1,000.00 | $1,707.04 | $2,707.04 |

Quarterly | 10.3813% | $1,000.00 | $1,685.06 | $2,685.06 |

Yearly | 10.00% | $1,000.00 | $1,593.74 | $2,593.74 |

Some notable differences in ROI include:

- daily compounding gives you 1.087% more than monthly
- weekly compounding gives you 0.864% more than monthly
- monthly compound frequency gives you 11.33% more than yearly
- daily compound frequency gives you 12.417% more than yearly