The frequency that a financial institution compounds interest on your deposit. Banks and financial institutions routinely use compounding to pay you a higher interest rate.

For example, a financial institution may be offering a CD that pays interest at 10%. If the institution does not compound interest, you will receive 10 percent of your investment as interest income at the end of a year.

But if the institution compounds interest every three months (quarterly compounding), you will earn an interest rate of 10.38%. If the institution compounds interest monthly, you will earn 10.47%. And if it compounds daily, you will earn 10.52%. For a $10,000 deposit, this is an extra $52 in interest that you earn.