Compound interest and European Securities and Markets Authority: Difference between pages

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Compound interest is calculated as ‘interest on interest’ as well as interest on the original principal amount.
(ESMA).  
 
Compound interest per year is the usual quotation basis for periods of more than a year.
 
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.


An independent EU Authority established to contribute to the stability of the European Union's financial system by ensuring the integrity, transparency, efficiency and orderly functioning of securities markets and enhancing investor protection.


== See also ==
== See also ==
* [[CAGR]]
* [[EMIR]]
* [[Compounding effect]]
* [[Day count conventions]]
* [[Effective annual rate]]
* [[Nominal annual rate]]
* [[Periodic rate of interest]]
* [[Periodic yield]]
* [[Simple interest]]

Revision as of 21:08, 13 August 2013

(ESMA).

An independent EU Authority established to contribute to the stability of the European Union's financial system by ensuring the integrity, transparency, efficiency and orderly functioning of securities markets and enhancing investor protection.

See also