Compounding factor

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Revision as of 05:04, 14 April 2015 by imported>Doug Williamson (Generalise to any number of periods.)
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(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 periodic 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