Compounding factor: Difference between revisions
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* [[Future value]] | * [[Future value]] | ||
* [[Present value]] | * [[Present value]] | ||
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[[Category:Manage_risks]] | |||
Revision as of 11:48, 22 February 2018
(CF).
A number greater than one which 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
Annual effective yield (r) = 6%.
Number of years in the total period (n) = 2.
Then:
Compounding Factor = (1 + r)n
= 1.062
= 1.1236.
