Economics Time Value Of Money Questions
Compounding refers to the process of earning interest on both the initial amount of money and the accumulated interest from previous periods. In the context of the time value of money, compounding plays a crucial role in determining the future value of an investment or a sum of money over time. By reinvesting the interest earned, the initial amount grows exponentially, leading to higher returns in the long run. Compounding allows individuals or businesses to understand the potential growth of their investments and make informed decisions regarding saving, investing, or borrowing money.