Simple, Periodic, and Daily Interest

Simple, periodic, and daily interest terms explain how a rate moves from an annual quotation to the interval in which interest is actually calculated. Annual Interest Rate identifies the one-year quote, while Periodic Interest Rate applies to a stated daily, monthly, quarterly, or other interval.

Daily Interest focuses on balance-by-balance accrual over days. Simple Interest describes a method in which prior interest is not added to the principal base for later interest calculations.

From Annual Quote to Accrued Interest

The general sequence is:

1. identify the annual quotation and what it represents;
2. derive or obtain the applicable period rate under the stated convention;
3. apply that rate to the eligible balance for each period; and
4. account for balance changes, compounding, crediting, and rounding.

For example, a 12% nominal annual rate convertible monthly corresponds to a 1% monthly periodic rate because 12% divided by 12 equals 1%. That conversion does not mean every product advertised at 12% uses a 1% monthly rate. An effective annual rate, daily-compounded rate, or regulated disclosure measure follows different rules.

What to Verify

• Whether the annual rate is nominal or effective.
• The number and length of periods used in the conversion.
• The balance method and timing of cash flows.
• The accrual and compounding frequencies, which may differ.
• The day-count denominator, rate-reset terms, fees, and rounding rules.

Never infer a daily or monthly rate from an annual headline without checking the agreement or disclosure that governs the calculation.

In this section

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