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

Annual effective yield (r) = 6%.

Number of years in the total period (n) = 2.

Then:

Compounding Factor = (1 + r)n

= 1.062

= 1.1236.


See also