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Compounding Interest and Discounting

Compounding interest calculates interest on both the initial principal and accumulated interest from previous periods, allowing the deposit or loan to grow at a faster rate than simple interest. Discounting is the technique used to determine the present value of future cash flows by converting them to their current worth. Compounding and discounting are opposites, with compounding converting present value to future value and discounting converting future value to present value. Tables of compounding and discounting factors are often used to quickly calculate these values by multiplying the factor by the amount.

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164 views

Compounding Interest and Discounting

Compounding interest calculates interest on both the initial principal and accumulated interest from previous periods, allowing the deposit or loan to grow at a faster rate than simple interest. Discounting is the technique used to determine the present value of future cash flows by converting them to their current worth. Compounding and discounting are opposites, with compounding converting present value to future value and discounting converting future value to present value. Tables of compounding and discounting factors are often used to quickly calculate these values by multiplying the factor by the amount.

Uploaded by

Vishal Vij
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Compounding Interest and Discounting

Compounding interest

Compound interest has been the interest calculated on initial principal along with in

addition on accumulated interest of past periods of the deposit or loan. Compound interest may

be thought of like interest on interest along with would make the deposit or loan grow at the

faster rate apart from the simple interest that has been interest calculated just on principal

amount. Rate at that compound interest accrues is based on frequency of the compounding; high

number of the compounding periods, greater compound interest.

Discounting

Technique utilized for deciding the present value of the future cash flows has been called

as Discounting. Discounting has been procedure of converting the future amount in their Present

Value. Discounting has been the method to compute current value of the future

money. Discounting tools helps to ascertain current value of the future cash flows through

implementing the discount rate.

Differences between Compounding and Discounting

Compounding and Discounting have simply been opposite to each other. Compounding

converts present value in the future value along with discounting converts future value in the

present value. Therefore, we may say that when we reverse the compounding this would become

discounting.
Compounding Factor table along with Discounting Factor table has often been taken into

consideration for faster calculation of two. In table we would find factors, in regard to separate

rates as well as periods. Factor has directly been multiplied through volume to arrive

present/future value.

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