Stated Interest Rate

• Stated interest rate is often referred to as the nominal interest rate, which may or may not be the actual yield earned on an investment. Stated interest rate is the base rate used to calculate investment interest for any period within the time of the investment and often expressed in an annual percentage. However, the stated interest rate is not the often quoted APY, or annual percentage yield, the preferred measure to interest rate disclosed in many interest-rate bearing investment savings products. APY is the resulting interest earned annually based on the stated interest rate and the method of interest calculation, simple or compound.
  
  

Simple Interest Effect

• Simple interest doesn't affect or add more to an investment beyond what the investment is supposed to earn in interest under the stated interest rate. In other words, the effective or actual interest rate for a simple interest investment equals the investment's stated interest rate. In simple interest calculation, interest earned based on the stated interest rate at the end of an interest-paying period is not added to the investment principal to be used for interest calculation in the next period. In a simple interest investment, interest calculation for all periods is based on the original investment principal. Earlier interest accumulation has no effect on later interest earned.
  
  

Periodic Interest Rate

• Periodic interest rate is the rate converted from the stated annual interest rate to adjust to a different time period used for calculating its corresponding interest. Interest may be calculated annually, semi-annually, monthly or even daily. Assume a stated annual interest rate of 12 percent. To calculate interest earned mid-year, the annual interest rate of 12 percent is converted to a semi-annual interest rate of 6 percent (12 percent/2). Similarly, the monthly interest rate would be 12 percent/12 = 1 percent. The use of periodic interest rate is necessary for interest compounding that often has compounding periods of less than a year.
  
  

Compound Interest Effect

• While interest may be compounded on an annual basis, it is more likely that interest compounding is based on a shorter time interval within a year. Compound interest affects an investment by yielding more investment returns in shorter time. The compounding interest effect on investments derives from adding interest earned in prior periods to the outstanding investment principal. As a result, interest to be earned in later periods will increase proportionately with the ever enlarged principal base. The total interest earned in a year from interest compounding often is referred to as the APY, which is higher than the annual interest rate offered on an investment.