Compounding effect - Revision history

imported>Doug Williamson: Add definition - source - linked pages.

2023-04-18T21:59:50Z

Add definition - source - linked pages.

← Older revision		Revision as of 21:59, 18 April 2023
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	~~Compounding~~ effects are the additional growth or additional interest, resulting from the compounding effects of - for example - interest on interest.		1. ''Financial maths.''

			In maths, compounding effects are the additional growth or additional interest, resulting from the compounding effects of - for example - interest on interest.


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	[[File:Compounding effects illustration.png\|{850}px\|850px]]		[[File:Compounding effects illustration.png\|{850}px\|850px]]


			2. ''Risk management.''

			Additional adverse consequences which occur when multiple adverse conditions arise at the same time.


			:<span style="color:#4B0082">'''''Related global risks with compounding effects'''''</span>

			:"[Global] risks can also interact with each other to form a 'polycrisis' – a cluster of related global risks with compounding effects, such that the overall impact exceeds the sum of each part."

			:''World Economic Forum (WEF) - Global Risks Report 2023 - p57.''


	== See also ==		== See also ==
			* [[Adverse]]
	* [[Compound]]		* [[Compound]]
	* [[Compound interest]]		* [[Compound interest]]
	* [[Compounding factor]]		* [[Compounding factor]]
			* [[Consequential risk]]
	* [[Continuously compounded rate of return]]		* [[Continuously compounded rate of return]]
	* [[Exponential growth]]		* [[Exponential growth]]
	* [[Geometric progression]]		* [[Geometric progression]]
			* [[Global risk]]
	* [[Linear]]		* [[Linear]]
			* [[Polycrisis]]
			* [[Risk management]]
	* [[Simple interest]]		* [[Simple interest]]
			* [[World Economic Forum]] (WEF)

	[[Category:Manage_risks]]		[[Category:Manage_risks]]

imported>Doug Williamson: Make image smaller.

2020-12-29T22:12:11Z

Make image smaller.

← Older revision		Revision as of 22:12, 29 December 2020
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			[[File:Compounding effects illustration.png\|{850}px\|850px]]
	[[File:Compounding effects illustration.png]]


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	* [[Geometric progression]]		* [[Geometric progression]]
	* [[Linear]]		* [[Linear]]
			* [[Simple interest]]

	[[Category:Manage_risks]]		[[Category:Manage_risks]]

imported>Doug Williamson: Mend link.

2020-12-29T00:46:26Z

Mend link.

← Older revision		Revision as of 00:46, 29 December 2020
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	* [[Continuously compounded rate of return]]		* [[Continuously compounded rate of return]]
	* [[Exponential growth]]		* [[Exponential growth]]
	* [[Geometric]]		* [[Geometric progression]]
	* [[Linear]]		* [[Linear]]

	[[Category:Manage_risks]]		[[Category:Manage_risks]]

imported>Doug Williamson: Add illustration.

2020-12-29T00:12:44Z

Add illustration.

← Older revision		Revision as of 00:12, 29 December 2020
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	~~The~~ additional growth or additional interest, resulting from the compounding effects of - for example - interest on interest.		Compounding effects are the additional growth or additional interest, resulting from the compounding effects of - for example - interest on interest.


	<span style="color:#4B0082">'''Example 1: Compounding for two years at 6% per annum'''</span>		<span style="color:#4B0082">'''Example 1: Compounding for two years at 5% per annum'''</span>

	Interest quoted at 6% per annum, compounded annually, for two years maturity, means that the interest accumulated after two years is:		Interest quoted at 5% per annum, compounded annually, for two years maturity, means that the interest accumulated after two years is:

	= (1.06 x 1.06) - 1		= (1.05 x 1.05) - 1

	= 12.36% for the two year period.		= 10.25% for the two year period.


	Without the additional interest on interest, the total interest would have been simply		Without the additional interest on interest, the total interest would have been simply

	6% per annum x 2 years		5% per annum x 2 years

	= 12.00%.		= 10.00%.


	So the compounding effect of interest on interest here		So the compounding effect of interest on interest here

	= 12.36% - 12.00%		= 10.25% - 10.00%

	= 0.36% over the two year period (= 6% x 6%).		= 0.25% over the two year period (= 5% x 5%).


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	<span style="color:#4B0082">'''Example 2: Compounding for two years at 60% per annum'''</span>		<span style="color:#4B0082">'''Example 2: Compounding for two years at 50% per annum'''</span>

	Sales are growing at 60% per annum, for two years.		Sales are growing at 50% per annum, for two years.

	This means that the total growth after two years is:		This means that the total growth after two years is:

	= (1.60 x 1.60) - 1		= (1.50 x 1.50) - 1

	= ~~156~~% for the two year period.		= 125% for the two year period.


	Without the additional growth on growth, the total growth would have been simply		Without the additional growth on growth, the total growth would have been simply

	60% per annum x 2 years		50% per annum x 2 years

	= ~~120~~%.		= 100%.


	So the compounding effect of growth on growth here		So the compounding effect of growth on growth here

	= ~~156~~% - ~~120~~%		= 125% - 100%

	= 36% over the two year period (= 60% x 60%).		= 25% over the two year period (= 50% x 50%).



	<span style="color:#4B0082">'''Example 3: Compounding for 20 years at 6% per annum'''</span>		<span style="color:#4B0082">'''Example 3: Compounding for 20 years at 5% per annum'''</span>

	Interest quoted at 6% per annum, compounded annually, for 20 years maturity, means that the interest accumulated after 20 years is:		Interest quoted at 5% per annum, compounded annually, for 20 years maturity, means that the interest accumulated after 20 years is:

	= 1.06<sup>20</sup> - 1		= 1.05<sup>20</sup> - 1

	= ~~221~~% for the 20-year period.		= 165% for the 20-year period.


	Without the additional interest on interest, the total interest would have been simply		Without the additional interest on interest, the total interest would have been simply

	6% per annum x 20 years		5% per annum x 20 years

	= ~~120~~%.		= 100%.


	So the compounding effect of interest on interest here		So the compounding effect of interest on interest here

	= ~~221~~% - ~~120~~%		= 165% - 100%

	= ~~101~~% over the 20-year period.		= 65% over the 20-year period.



			[[File:Compounding effects illustration.png]]


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	* [[Compounding factor]]		* [[Compounding factor]]
	* [[Continuously compounded rate of return]]		* [[Continuously compounded rate of return]]
	* [[~~Discount~~]]		* [[Exponential growth]]
			* [[Geometric]]
			* [[Linear]]

	[[Category:Manage_risks]]		[[Category:Manage_risks]]

imported>Doug Williamson: Layout.

2020-12-26T15:11:18Z

Layout.

@@ Line 1: / Line 1: @@
 The additional growth or additional interest, resulting from the compounding effects of - for example - interest on interest.
+<span style="color:#4B0082">'''Example 1: Compounding for two years at 6% per annum'''</span>
 Interest quoted at 6% per annum, compounded annually, for two years maturity, means that the interest accumulated after two years is:
@@ Line 30: / Line 28: @@
 When either the number of periods or the rate of growth/interest - or both - are greater, compounding effects quickly become very much larger.

imported>Doug Williamson: Add link.

2020-12-26T14:26:07Z

Add link.

← Older revision		Revision as of 14:26, 26 December 2020
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	== See also ==		== See also ==
			* [[Compound]]
	* [[Compound interest]]		* [[Compound interest]]
	* [[Compounding factor]]		* [[Compounding factor]]

imported>Doug Williamson: Improve calculations.

2016-01-15T20:35:27Z

Improve calculations.

← Older revision		Revision as of 20:35, 15 January 2016
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	Interest quoted at 6% per annum, compounded annually, for two years maturity, means that the interest accumulated after two years is:		Interest quoted at 6% per annum, compounded annually, for two years maturity, means that the interest accumulated after two years is:

	= ( 1.06 x 1.06 ) - 1		= (1.06 x 1.06) - 1

	= 12.36% for the two year period.		= 12.36% for the two year period.
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	= 12.36% - 12.00%		= 12.36% - 12.00%

	= 0.36% over the two year period ( = 6% x 6% ).		= 0.36% over the two year period (= 6% x 6%).

imported>Brianlenoach@hotmail.co.uk: Add link.

2015-03-25T14:45:02Z

Add link.

← Older revision		Revision as of 14:45, 25 March 2015
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	* [[Compounding factor]]		* [[Compounding factor]]
	* [[Continuously compounded rate of return]]		* [[Continuously compounded rate of return]]
			* [[Discount]]

	[[Category:Manage_risks]]		[[Category:Manage_risks]]

imported>Doug Williamson: Standardise appearance of page.

2015-03-15T13:17:38Z

Standardise appearance of page.

← Older revision		Revision as of 13:17, 15 March 2015
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	'''~~For example,~~'''		'''Example'''

	~~interest~~ quoted at 6% per annum, compounded annually, for two years maturity, means that the interest accumulated after two years is:		Interest quoted at 6% per annum, compounded annually, for two years maturity, means that the interest accumulated after two years is:

	= ( 1.06 x 1.06 ) - 1		= ( 1.06 x 1.06 ) - 1
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	When both the number of periods and the rate of growth/interest are low, compounding effects are relatively small.		When both the number of periods and the rate of growth/interest are low, compounding effects are relatively small.
	When either the number of periods or the rate of growth/interest - or both - are greater, compounding effects become very much larger.
			When either the number of periods or the rate of growth/interest - or both - are greater, compounding effects quickly become very much larger.

imported>Doug Williamson: Align presentation of formula with qualification material

2015-03-14T15:25:45Z

Align presentation of formula with qualification material

← Older revision		Revision as of 15:25, 14 March 2015
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	For example, ~~interest quoted at 6% per annum, compounded annually, for two years maturity, means that the interest accumulated after two years is:~~		'''For example,'''

	= [1.06 x 1.06] - 1		interest quoted at 6% per annum, compounded annually, for two years maturity, means that the interest accumulated after two years is:

			= ( 1.06 x 1.06 ) - 1

	= 12.36% for the two year period.		= 12.36% for the two year period.
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	= 12.36% - 12.00%		= 12.36% - 12.00%

	= 0.36% over the two year period (= 6% x 6%).		= 0.36% over the two year period ( = 6% x 6% ).