Arises when interest or preferred dividend or distribution (in the case of LLCs) is added to the principal of a loan, note or preferred equity security, so that, from that moment on, the interest or preferred dividend that has been added to the underlying invested capital also earns interest or dividends. For example, a monthly compounding note would compound 12 times in one year if the interest were not paid each month. This applies to debt and too preferred equity securities.

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