Economics Time Value Of Money Questions Medium
The compounding period refers to the frequency at which interest is added to an investment. It can be daily, monthly, quarterly, semi-annually, or annually. The compounding period has a significant impact on the future value of an investment.
When the compounding period is more frequent, such as daily or monthly, the investment has more compounding periods within a given time frame. This means that the interest earned on the investment is added more frequently, leading to a higher future value. In other words, the more compounding periods there are, the more interest is earned on the initial investment, resulting in a larger future value.
On the other hand, when the compounding period is less frequent, such as annually, there are fewer compounding periods within the same time frame. This means that the interest earned on the investment is added less frequently, resulting in a lower future value compared to more frequent compounding periods.
In summary, the compounding period directly affects the future value of an investment. The more frequent the compounding periods, the higher the future value, while less frequent compounding periods result in a lower future value.