Fixed Deposit (FD)

When a bank advertises a Fixed Deposit (FD) at 7% p.a., the actual return you get is often slightly higher than 7%. This is due to the magic of compounding frequency.

In countries like India, the RBI mandates that banks calculate and credit interest to your FD account every quarter (every 3 months), rather than just once at the absolute end of the year.

Because the interest is credited quarterly, that credited interest also starts earning its own interest for the remaining quarters of the year. This snowball effect means your money grows slightly faster than simple interest.

This creates a difference between the Nominal Rate (the advertised 7%) and the Effective Annualized Rate (EAR).

EAR = (1 + r/n)^n - 1

For a 7% FD compounded quarterly (n=4):

EAR = (1 + 0.07/4)^4 - 1 = 7.18%

Your actual yield over a single year is 7.18%, not 7.00%. Over a 5-year or 10-year period, this tiny quarterly boost snowballs into thousands of extra rupees.