Compound interest: Difference between revisions
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Compound interest per year is the usual quotation basis for periods of more than a year. | Compound interest per year is the usual quotation basis for periods of more than a year. | ||
To calculate compound interest for different periods we compound up or de-compound the interest depending on the relative lengths of the periods being considered. | To calculate compound interest for different periods we compound up or de-compound the interest depending on the relative lengths of the periods being considered. | ||
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means that the interest paid after two years will be (compounding up for two periods): | means that the interest paid after two years will be (compounding up for two periods): | ||
= ( 1.06 x 1.06 ) - 1 | = (1.06 x 1.06) - 1 | ||
= 12.36% periodic interest for the two year period. | = 12.36% periodic interest for the two year period. | ||
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Decompounding the 12.36% (per two years) to calculate the interest for just one year. One year's interest: | Decompounding the 12.36% (per two years) to calculate the interest for just one year. One year's interest: | ||
= ( 1 + 0.1236 )<sup>(1/2)</sup> - 1 | = (1 + 0.1236)<sup>(1/2)</sup> - 1 | ||
= 6.00% per one-year period. | = 6.00% per one-year period. | ||
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== See also == | == See also == | ||
* [[ | * [[Compound]] | ||
* [[Compound Annual Growth Rate]] | |||
* [[Compounding effect]] | * [[Compounding effect]] | ||
* [[Day count conventions]] | * [[Day count conventions]] | ||
* [[Effective annual rate]] | * [[Effective annual rate]] | ||
* [[Interest]] | |||
* [[Interest rate]] | |||
* [[Nominal annual rate]] | * [[Nominal annual rate]] | ||
* [[Periodic rate of interest]] | * [[Periodic rate of interest]] | ||
* [[Periodic yield]] | * [[Periodic yield]] | ||
* [[Simple interest]] | * [[Simple interest]] | ||
* [[Time value of money]] | |||
[[Category:Cash_management]] | |||
[[Category:Financial_products_and_markets]] | |||
[[Category:Liquidity_management]] | |||
Latest revision as of 18:37, 30 October 2021
Compound interest is calculated as ‘interest on interest’ as well as interest on the original principal amount.
Compound interest per year is the usual quotation basis for periods of more than a year.
To calculate compound interest for different periods we compound up or de-compound the interest depending on the relative lengths of the periods being considered.
Example 1
Interest quoted at 6% per annum,
compounded annually,
for two years maturity,
with all of the interest paid at the final maturity,
means that the interest paid after two years will be (compounding up for two periods):
= (1.06 x 1.06) - 1
= 12.36% periodic interest for the two year period.
Decompounding is used to calculate periodic interest for a shorter period.
Example 2
If periodic interest is 12.36% for a two-year period, this means the total accumulated interest payable/receivable at the end of the two years is 12.36%.
Decompounding the 12.36% (per two years) to calculate the interest for just one year. One year's interest:
= (1 + 0.1236)(1/2) - 1
= 6.00% per one-year period.
