Final answer:
The greater the number of compounding periods per year, the higher the effective rate of return. Compound interest calculated on an increasing frequency leads to faster growth of the investment, with interest accumulating on already-earned interest.
Step-by-step explanation:
Yes, everything else being equal, the greater the number of compounding periods per year, the greater the effective rate of return that is earned on an investment. Compound interest is the interest on a loan or deposit calculated based on both the initial principal and the accumulated interest from previous periods. When you increase the number of compounding periods, interest is calculated on a more frequent basis, and the investment grows at a faster rate due to interest being calculated on interest more often.
For example, if you start with a $3,000 investment at a 7% annual rate of return, compounded annually for 40 years, the formula will be as follows:
3,000(1 + .07)
40
= $44,923
However, if the interest were to be compounded quarterly, there would be more periods of growth, and thus the final amount after 40 years would be larger than $44,923. This demonstrates the power of compound interest and its effect on growth over time.