Is it most profitable for interest to be compounded daily, monthly of quarterly?

Question

Common sense would tell me the answer is daily, but doesn't the APY work out the same in the end, regardless?

Answer 1

The shorter the period of time when interest is compounded, the higher the yield.  Continuous compounding is the highest.  The idea is that you are earning interest on the interest.

Answer 2

All else equal, the more often an interest rate is compounded, the higher net net result

Answer 3

It depends.  One percent per day is more than five percent per five days for example (1.01^5 = 1.051, or 5.1 percent).  

If you earn interest 5 percent in one year, then this would also be 1.05^(1/12) or 0.4 percent in one month.

I suggest you create a standard time frame, such as one year, to compare interest rates.  So, if you are comparing a six percent one year CD to a 2 percent 6-month note, you would square the six month yield, assuming renewal to finish the year: 1.02^2 = 1.0404, or 4.04 percent, which is far less than the CD, of course.

Interest per year varies wildly, and you will likely have to perform various calculations to compare them.