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Compound interest |
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Compound interestInterest paid on previously earned interest as well as on the principal.Compound interestThe interest paid on the principal balance in a mortgage and on the accrued and unpaid interest of the loan.Compound interestThe process by which interest earned on an investment is added back to the amount invested, so increasing the amount of 'principal' on which further interest will be earned in future years.Compounding is sometimes described as the miracle of investing. The fact is that if you reinvest income in your portfolio, you will end up with a much larger amount than if you spend the income as you go along because of the effect of compounding. But to allow compounding to work its magic, you have to start young.Albert Einstein, when asked what he considered to be mankind's greatest invention, replied 'Compound interest!'Similar MatchesCompound reversionary bonusCompound reversionary bonusA with profits life assurance bonus, normally added annually to the policy, which is based on the profits of the life company's investments.The compound reversionary bonus is normally calculated on the sum assured (or basic sum assured) plus bonuses to date and is payable at the maturity of the policy or prior death. Once declared, reversionary bonuses are guaranteed. Compound optionCompound optionOption on an option. Simple compound growth methodSimple compound growth methodCalculating a growth rate by relating terminal value to initial value and assuming a constant percentage annual rate of growth between the two values. Compound Annual Growth RateCompound Annual Growth RateBest defined by example. If you invest $100 today and make 5% in the first year and reinvest ($105) and make 8% in the second year, the compound annual growth rate is 6.489%. The calculation is $100x1.05x1.08=$113.4 which is what you end up with at the end of year two. The average return is [square root(113.4/100) -1]= 0.06489 or 6.489%. Note 1. If we had three compounding periods we would take the cubic root (power of 1/3). Note 2. If we had invested at exactly 6.489 in both periods, we get $100x1.06489x1.06489=$113.4. Note 3. The example is directed to a return - but CAGR could be applied to earnings growth, GDP growth, etc. Compounding frequencyCompounding frequencyThe number of compounding periods in a year. For example, quarterly compounding has a compounding frequency of 4. Further SuggestionsCompound growth rateCompound Annual Return Realized compound yield Compounding Discrete compounding compound annual growth rate Continuous compounding Compounding period Compound tariff |
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