To convert monthly into yearly interest rates, take the monthly interest rate, convert it into a decimal, add 1 to this decimal and raise it to the power of 12. Subtract 1 from the result and multiply by a hundred. This is your yearly interest rate, states the Houston Chronicle.
The formula for calculating yearly interest rates from monthly rates is strongly sensitive to the interest rate. This is because interest compounds on interest, making the deposit grow faster, Investopedia explains. The total compound interest increases with the interest rate and the number of periods. For example, if the interest rate and starting amount is the same for two investments, but interest is applied weekly to one investment and monthly to the other, the one compounding weekly has more total interest at the end of the year.
The alternative to compound interest is simple interest, which yields lower returns, notes Investopedia. The calculation of a simple interest is very simple: the rate is not raised to a power equal to the number of periods, as with compound interest, but is simply multiplied by the number of periods. With simple interest, new interest does not accrue to previous interest; it only accrues to the initial investment or principal. As a result, less overall interest gathers by the end of the investment’s lifetime.