imported>Doug Williamson |
imported>Doug Williamson |
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| Compound interest is calculated as ‘interest on interest’ as well as interest on the original principal amount.
| | A company specialising in the provision of insurance. |
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| Compound interest per year is the usual quotation basis for periods of more than a year.
| | Also known as an ''insurer.'' |
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| 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.
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| <span style="color:#4B0082">'''Example 1'''</span>
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| Interest quoted at 6% per annum,
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| compounded annually,
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| for two years maturity,
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| with all of the interest paid at the final maturity,
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| means that the interest paid after two years will be (compounding up for two periods):
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| = (1.06 x 1.06) - 1
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| = 12.36% periodic interest for the two year period.
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| Decompounding is used to calculate periodic interest for a shorter period.
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| <span style="color:#4B0082">'''Example 2'''</span>
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| 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%.
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| Decompounding the 12.36% (per two years) to calculate the interest for just one year. One year's interest:
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| = (1 + 0.1236)<sup>(1/2)</sup> - 1
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| = 6.00% per one-year period.
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| == See also == | | == See also == |
| * [[CAGR]] | | * [[ABI]] |
| * [[Compound]] | | * [[Captive insurance company]] |
| * [[Compounding effect]] | | * [[Insurance ]] |
| * [[Day count conventions]] | | * [[Insure]] |
| * [[Effective annual rate]] | | * [[Premium]] |
| * [[Interest]] | | * [[Risk]] |
| * [[Interest rate]] | | * [[Transfer]] |
| * [[Nominal annual rate]] | | * [[Underwriting]] |
| * [[Periodic rate of interest]]
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| * [[Periodic yield]]
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| * [[Simple interest]]
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| [[Category:Cash_management]]
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| [[Category:Financial_products_and_markets]]
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| [[Category:Liquidity_management]]
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