Compounding factor: Difference between revisions
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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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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> | ||
Revision as of 19:20, 15 January 2016
(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.
