Compounding effect: Difference between revisions
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imported>Doug Williamson m (Category added 9/10/13 and spacing) |
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When both the number of periods and the rate of growth/interest are low, compounding effects are relatively small. | When both the number of periods and the rate of growth/interest are low, compounding effects are relatively small. | ||
When either the number of periods or the rate of growth/interest - or both - are greater, compounding effects become very much larger. | When either the number of periods or the rate of growth/interest - or both - are greater, compounding effects become very much larger. | ||
== See also == | == See also == | ||
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* [[Compounding factor]] | * [[Compounding factor]] | ||
* [[Continuously compounded rate of return]] | * [[Continuously compounded rate of return]] | ||
[[Category:Interest_Rate_Risk]] | |||
Revision as of 14:00, 9 October 2013
The additional growth or additional interest, resulting from the compounding effects of - for example - interest on interest. For example, interest quoted at 6% per annum, compounded annually, for two years maturity, means that the interest accumulated after two years is:
= [1.06 x 1.06] - 1
= 12.36% for the two year period.
Without the additional interest on interest, the total interest would have been simply 6% per annum x 2 years = 12.00%. So the compounding effect of interest on interest here = 12.36% - 12.00% = 0.36% over the two year period (= 6% x 6%).
When both the number of periods and the rate of growth/interest are low, compounding effects are relatively small. When either the number of periods or the rate of growth/interest - or both - are greater, compounding effects become very much larger.
