imported>Doug Williamson |
imported>Doug Williamson |
| Line 1: |
Line 1: |
| Compound interest is calculated as ‘interest on interest’ as well as interest on the original principal amount.
| | Debt Service Cover Ratio or Debt Service Coverage Ratio. |
|
| |
|
| Compound interest per year is the usual quotation basis for periods of more than a year.
| | The same as Debt service ratio. |
| | |
| To calculate compound interest for different periods we compound up or de-compound the interest depending on the relative lengths of the periods being considered.
| |
| | |
| | |
| <span style="color:#4B0082">'''Example 1'''</span>
| |
| | |
| Interest quoted at 6% per annum,
| |
| | |
| compounded annually,
| |
| | |
| for two years maturity,
| |
| | |
| with all of the interest paid at the final maturity,
| |
| | |
| means that the interest paid after two years will be (compounding up for two periods):
| |
| | |
| = (1.06 x 1.06) - 1
| |
| | |
| = 12.36% periodic interest for the two year period.
| |
| | |
| | |
| Decompounding is used to calculate periodic interest for a shorter period.
| |
| | |
| | |
| <span style="color:#4B0082">'''Example 2'''</span>
| |
| | |
| If periodic interest is 12.36% for a two-year period, this means the total accumulated interest payable/receivable at the end of the two years is 12.36%.
| |
| | |
| Decompounding the 12.36% (per two years) to calculate the interest for just one year. One year's interest:
| |
| | |
| = (1 + 0.1236)<sup>(1/2)</sup> - 1
| |
| | |
| = 6.00% per one-year period.
| |
|
| |
|
|
| |
|
| == See also == | | == See also == |
| * [[CAGR]] | | * [[Debt service ratio]] |
| * [[Compound]]
| |
| * [[Compounding effect]]
| |
| * [[Day count conventions]]
| |
| * [[Effective annual rate]]
| |
| * [[Interest]]
| |
| * [[Interest rate]]
| |
| * [[Nominal annual rate]]
| |
| * [[Periodic rate of interest]]
| |
| * [[Periodic yield]]
| |
| * [[Simple interest]]
| |
| | |
| [[Category:Cash_management]]
| |
| [[Category:Financial_products_and_markets]]
| |
| [[Category:Liquidity_management]]
| |
