A Visual Guide to Simple, Compound and Continuous Interest Rates

The trouble with interest rates is that there are effectively two infinite dimensions worth of possible units a given rate can be in. In order to be completely accurate, you have to say "A return of X% over Y time periods, compounded Z times per period" and many of the different available options for Y and Z actually get used. For example corporate bonds are often Y = 1 year, Z = 6 months. In a business class, if you were to find the interest rate implied by the cash flows of the bond, you would probably solve for Y = 6 months Z = 6 months. Then the answer might be required to be in Y = 1 year, Z = 1 year or Y = 1 year, Z = 6 months depending on the question. It also doesn't help that for certain values of Y and Z you have ambiguous names like effective annual yield, nominal yield, yield to maturity, annual percentage rate, annual percentage yield, etc. So you take this somewhat nasty unit conversion problem, pretend it doesn't exist, and then mix in a heaping helping of undergraduate marketing students or average joes doing personal finance and you get a recipe for confusion.

Terrible. All you need is a plot of the amount of money in your account at time t color-coded by the method of interest calculation. The $$$ at a given time (let's use something like a 5-year CD for our ''fixed'' example and a yearly compounding financial product with dividend/interest reinvestment as our ''compound'' example) will say it all.

Anyone who can't ''get it'' with that presentation isn't going to benefit from the verbose explanation presented.

I gave up after a few paragraphs, perhaps that article makes it seem more complicated than necessary? I think I already understand the interest rates, though, so I was not overly motivated to read on.

compound interest is much easier to understand with a $ sign :)