Nominal rate versus effective yield
A nominal annual rate tells you the yearly rate before compounding is applied. The effective annual yield tells you what you actually earn once interest is credited more than once a year. Eight per cent compounded quarterly is slightly better than eight per cent compounded annually — same headline, different outcome.
Two banks can advertise the same rate and pay different amounts purely because of frequency, so ask how often interest is credited before comparing.
How large is the difference?
Smaller than most people expect over short periods, and meaningful over long ones. The gap widens with both the rate and the tenure, because each extra compounding event contributes to a bigger base. Over a fifteen-year horizon on a large amount, frequency alone can be worth a noticeable sum — but it will never rescue a rate that is a full percentage point lower.
What to check on a real product
Deposit products differ in convention: some credit interest quarterly, some at maturity, and some pay it out instead of reinvesting. A payout deposit does not compound at all on the paid amounts, which changes the comparison entirely.
- Ask whether interest is compounded or paid out.
- Confirm the crediting frequency, not just the annual rate.
- Compare like with like by converting offers to an effective annual yield.
See it on your own numbers
Run the same principal, rate and tenure at different compounding frequencies and read the maturity values side by side. Doing it once makes the size of the effect concrete and stops it from being either ignored or overstated.