Compounding factor

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Financial maths.


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


n = number of periods

Example 1 - compounding factor calculation

Annual effective yield (r) = 6%.

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


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.

See also