Compounding factor: Difference between revisions
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imported>Doug Williamson (Generalise to any maturity.) |
imported>Doug Williamson (Add second example.) |
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''Financial maths.'' | |||
(CF). | (CF). | ||
A number greater than one | A compounding factor is a number greater than one, that we multiply a present value by, to work out its [[Future Value]] (FV) as: | ||
FV = CF x present value. | FV = CF x present value. | ||
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The Compounding Factor is calculated from the periodic yield as: | The Compounding Factor is calculated from the periodic yield as: | ||
CF = ( 1 + periodic yield )<sup>n</sup> | CF = (1 + periodic yield)<sup>n</sup> | ||
Where: | Where: | ||
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'''Example''' | <span style="color:#4B0082">'''Example 1 - compounding factor calculation'''</span> | ||
Annual effective yield (r) = 6%. | Annual effective yield (r) = 6%. | ||
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Then: | Then: | ||
Compounding Factor = ( 1 + r )<sup>n</sup> | Compounding Factor = (1 + r)<sup>n</sup> | ||
= 1.06<sup>2</sup> | = 1.06<sup>2</sup> | ||
= 1.1236. | = '''1.1236.''' | ||
<span style="color:#4B0082">'''Example 2 - future value calculation'''</span> | |||
Continuing Example 1, where the compounding factor for a two-year period = 1.1236. | |||
If the starting amount (present value) is, for example, $100m, | |||
the end amount (future value) is given by: | |||
FV = PV x CF | |||
= $100m x 1.1236 | |||
= '''$112.36m.''' | |||
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* [[Future value]] | * [[Future value]] | ||
* [[Present value]] | * [[Present value]] | ||
[[Category:Financial_management]] | |||
[[Category:Corporate_finance]] | |||
[[Category:Manage_risks]] | |||
Latest revision as of 11:06, 7 March 2022
Financial maths.
(CF).
A compounding factor is a number greater than one, that we multiply a present value by, to work out its Future Value (FV) as:
FV = CF x present value.
The Compounding Factor is calculated from the periodic yield as:
CF = (1 + periodic yield)n
Where:
n = number of periods
Example 1 - compounding factor calculation
Annual effective yield (r) = 6%.
Number of years in the total period (n) = 2.
Then:
Compounding Factor = (1 + r)n
= 1.062
= 1.1236.
Example 2 - future value calculation
Continuing Example 1, where the compounding factor for a two-year period = 1.1236.
If the starting amount (present value) is, for example, $100m,
the end amount (future value) is given by:
FV = PV x CF
= $100m x 1.1236
= $112.36m.
