periodic interest rate
Definition
The rate of interest assessed on a loan or investment over a set time period when compounding occurs more than once per year. The equation for determining the periodic rate is: pr = ar / n.
Where: pr = periodic interest rate, ar = annual interest rate, n = number of times per year interest is compounded.
For example, an annual interest rate of 6% compounded monthly would be an interest rate of .005 per month (06 / 12 = .005). This method of compounding results in more total interest being accumulated over the course of a year since interest is being charged on interest more often.
