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.
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| Compound interest per year is the usual quotation basis for periods of more than a year.
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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.
| | == See also == |
| | | * [[Company]] |
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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
| | [[Category:Treasury_operations_infrastructure]] |
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| = 6.00% per one-year period.
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| == See also ==
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| * [[CAGR]]
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| * [[Compounding effect]]
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| * [[Day count conventions]]
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| * [[Effective annual rate]]
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| * [[Nominal annual rate]]
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| * [[Periodic rate of interest]]
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| * [[Periodic yield]]
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| * [[Simple interest]]
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