Compounding factor
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Financial maths.
(CF).
A compounding factor is a number greater than one, that we multiply a present value by, to work out its Future Value (FV) as:
FV = CF x present value.
The Compounding Factor is calculated from the periodic yield as:
CF = (1 + periodic yield)n
Where:
n = number of periods
Example 1 - compounding factor calculation
Annual effective yield (r) = 6%.
Number of years in the total period (n) = 2.
Then:
Compounding Factor = (1 + r)n
= 1.062
= 1.1236.
Example 2 - future value calculation
Continuing Example 1, where the compounding factor for a two-year period = 1.1236.
If the starting amount (present value) is, for example, $100m,
the end amount (future value) is given by:
FV = PV x CF
= $100m x 1.1236
= $112.36m.
