# Compounding factor

*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}

= 1.06^{2}

= **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.**