What is better for the consumer simple interest or compounded daily?

Answer 1

I'm thinking of bonds when answering this question.

The more frequent the compounding the better it will be for the lender.

The less frequent the compounding the better it will be for the borrower.

Lets use this example:

Interest = 10%

Principle = $1000

Compounding A = Annually

Compounding B = Quarterly

Time period = 2 years

A) At the end of the first year $100 in interest would have been made making the balance $1100. At the end of the second year $110 would be earned because of compounding and the balance would be $1210.

B) At the end of the first year $103.81 in interest would have been earned with a ending balance of $1103.81. At the end of the second year the interest earned would be $114.59 and the ending balance would be $1218.40.

What I showed here is that if you are the one receiving the interest you would prefer daily compounding.

When you're paying out interest you would prefer simple interest.