From ACT Wiki
Jump to: navigation, search

To compound means:

  • to calculate interest, return or growth on an accumulating total,
  • including earlier amounts of interest, return or growth.

Compound interest is calculated as ‘interest on interest’ as well as interest on the original principal amount.

Compound rates of return or growth are similarly calculated based on the rolling up accumulated total amount, rather than just the initial amount.

Example: compound growth calculation

Rate of growth per year (r) = 30%.

Number of years in the total time under review (n) = 2.

Starting amount $100m

Growth for the first year:

= $100m x 0.30

= $30m

Balance at the end of the first year:

$100m + $30m

= $130m

Growth for the second year:

= $130m x 0.30

= $39m

Balance at the end of the second year:

$130m + $39m

= $169m

Total percentage growth for the two-year period:

169/100 - 1

= 1.69 - 1

= 0.69

= 69%

See also