Daily Compound Interest  What is Daily Compound Interest?

Daily compounded interest means interest is accumulated on daily basis and is calculated by charging interest on principal plus interest earned on a daily basis and therefore, it be higher than interest compounded on monthly/quarterly basis due to high frequency of compounding.

Formula

A=(P (1+r/n)^(nt)) – P

For eg:
Source: Daily Compound Interest (wallstreetmojo.com)

Where

• A=Daily compound rate
• P=Principal amount
• R=Rate of interest
• N=Time period

Generally, when someone deposits money in the bank, the bank pays interest to the investor in quarterly interest. But when someone lends money from the banks, the banks charge the interest from the person who has taken the loan in daily compounding interest. This scenario is mostly applicable in the case of credit cards.

Examples

Example #1

A sum of \$4000 is borrowed from the bank where the interest rate is 8%, and the amount is borrowed for two years. Let us determine how much will be daily compounded interest calculation by the bank on loan provided.

Solution:

= (\$4000(1+8/365)^(365*2))-\$4000

Example #2

Daily compounding is practically applicable for credit card spending, which is charged by the banks on the individuals who use credit cards. Credit cards generally have a cycle of 60 days, during which time the bank does not charge any interest, but interest is charged when the interest does not pay back within 60 days. If a sum of \$4000 is used using a credit card by an individual for its spending. And the interest rate is 15% per annum as the interest charged for a credit card is generally very high. And the amount is repaid by the individual after 120 days that is 60 days after the grace period is over. So the individual needs to pay the bank interest for 60 days, and he is charged at a daily compounding rate.

Solution:

= \$4000(1+15/365)^(365*(12/60))-\$4000

Example #3

A sum of \$35000 is borrowed from the bank as a car loan where the interest rate is 7% per annum, and the amount is borrowed for five years. Let us determine how much will be daily compounded interest calculation by the bank on loan provided.

Solution:

= (\$35000(1+.07/365) ^ (365*5))-\$35000

Relevance and Use

Generally, when someone deposits money in the bank, the bank pays interest to the investor in quarterly interest. But when someone lends money from the banks, the banks charge the interest from the person who has taken the loan in daily compounding interest. The higher the frequency, the more the interest charged or paid on the principal. It is how the banks make their money on the differential of the interest.