How to Calculate Compound Interest Rate

by Michael Keenan ; Updated July 27, 2017
Banks usually compound interest monthly.

When you are paid interest on your account more than once per year, the functional rate of return will be higher than the annual percentage rate (APR) because of interest compounding. For example, if you are paid interest each month, the interest that you earn in January will accrue more interest in the next 11 months. Similarly, the interest earned in February, will accrue additional interest for 10 more months. To figure the compound interest rate, you need to know the APR and how often interest is compounded.

Step 1

Divide the annual interest rate by the number of times per year interest is compounded. For example, if interest is compounded semimonthly, you would have 24 interest compounding periods. If your annual interest rate was 9.864 percent, you would divide 9.864 by 24 to get 0.411 percent.

Step 2

Divide the periodic interest rate by 100 to change it from a percentage to a decimal. In this example, you would divide 0.411 by 100 to get 0.00411.

Step 3

Increase the periodic rate by 1. In this example, you would add 1 to 0.00411 to get 1.00411.

Step 4

Use exponents to calculate the result from Step 3 to the Cth power, where C is the number of times per year interest is compounded. Exponents represent a number multiplied by itself a certain number of times. For example, five to the third power equals five times five times five. In this example, you would raise 1.00411 to the 24th power to get 1.103445821.

Step 5

Subtract 1 from the result from Step 4 to find the compound interest rate. Concluding the example, you would subtract 1 from 1.103445821 to find that the compound interest rate equals 0.103445821, or about 10.34 percent.

About the Author

Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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