Compounding factor

(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.

See also

• Compounding effect
• Discount factor
• Future value
• Present value