Regardless of the compounding frequency, most interest rates are expressed as an annual rate or percentage. This is called the nominal rate. However, if your account compounds twice per year, then you need to calculate the period interest rate for half of a year. This allows you to accurately calculate the interest earned on your account with respect to its compounding frequency.
1. Talk to your bank and ask for the interest rate. This will be in annual form.
2. Divide this value by 2. As an example, an 8 percent annual interest rate would equate to 4 percent interest over half a year.
3. Add 1 to the decimal version of this number and square it. Subtract 1 to calculate the annual percentage yield, which is the amount of interest you are really earning, or being charged, per year. In the example, you would square 1.04 to get 1.0816, or an interest rate of 0.0816. This means your annual 8 percent interest rate is effectively 8.16 percent when calculating for the effects of compound interest.
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