Compound interest and Negative yield curve: Difference between pages

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Compound interest is calculated as ‘interest on interest’ as well as interest on the original principal amount.
A situation in which market interest rates for longer term funds are lower than those for shorter maturities.


Compound interest per year is the usual quotation basis for periods of more than a year.
Also known as an Inverse yield curve.


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.
For example, 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.
For example, 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]]
* [[Forward yield]]
* [[Compounding effect]]
* [[Zero coupon yield]]
* [[Periodic rate of interest]]
* [[Par yield]]
* [[Simple interest]]
* [[Inverse yield curve]]
* [[Yield curve]]
 
* [[Falling yield curve]]
* [[Flat yield curve]]
* [[Positive yield curve]]
* [[Rising yield curve]]

Revision as of 10:45, 13 November 2015

A situation in which market interest rates for longer term funds are lower than those for shorter maturities.

Also known as an Inverse yield curve.


See also