My bank says that interest on my CD account compounds daily. How can they be compounding daily if they only put interest on the account balance once a month?
When the bank calculates your interest each day, it sets it up in a separate "bucket" in the computer record for your account. Each day, they combine the amount in that interest bucket with the balance of the account, calculate another day's interest, and add the new amount to the amount in the interest bucket. The amount in the bucket gets bigger every day, so the amount that your interest is based on grows each day, too. That's daily compounding.
At the end of each interest month, the bank takes the amount in the bucket and actually adds it to the balance of the account, leaving the interest bucket empty for the next month's series of calculations. That's how you get daily compounding with monthly posting. The bank could have given you the exact same result with monthly compounding if it used a slightly higher interest rate and only calculated interest once each month, but "daily compounding" has a better sound to it, don't you agree?
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When the bank calculates your interest each day, it sets it up in a separate "bucket" in the computer record for your account. Each day, they combine the amount in that interest bucket with the balance of the account, calculate another day's interest, and add the new amount to the amount in the interest bucket. The amount in the bucket gets bigger every day, so the amount that your interest is based on grows each day, too. That's daily compounding.
