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 which we multiply a present value by, to work out its [[Future Value]] (FV) as:
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.


See also