Interest is paid in several ways.
Simple interest is expressed as a percentage of the principal over a year.
Compound interest occurs when calculations of interest are made on the principal plus accumulated interest. For instance, a 4.25 per cent annual interest rate compounded monthly becomes, in effect, a 4.33 per cent annual interest rate. The expected real rate of interest is the difference between the nominal rate of interest and the expected rate of inflation. For example, with a nominal interest rate of 6 per cent and an expected rate of inflation of 2 per cent, the expected real rate of interest is 4 per cent. Contrary to what many people believe, banks and other financial institutions do not fundamentally determine the general level of interest rates.