Skip to main content

Know Your Terms : Compound Interest

Termology

  1. Principal: The sum that was initially invested.
  2. The rate at which interest is earned, expressed as a percentage.
  3. Compounded Interest Frequency: The frequency at which interest is compounded (e.g., monthly, quarterly, annually).
  4. Time: The period of time during which the investment is held.
  5. Compound Interest: The interest that is earnt on both the principal and any accrued interest.
  6. Annual percentage yield (APY): The rate of return on an investment over a year, which accounts for compounding interest.
  7. Nominally: The interest rate without taking into account compounding.
  8. Effective Interest Rate: The interest rate with regard to compounding.



Key Ideas

  1. The Rule of 72 is a formula that estimates the number of years it will take for an investment to double in value, based on the interest rate.
  2. The compound interest formula is as follows: A = P(1 + r/n)^(nt), where A represents the future value, P is the principal, r is the interest rate, n is the compounding frequency, and t is the time unit.

Comments

Post a Comment

Popular posts from this blog

Know Your Terms : Capital Gains Tax

I n simple terms, Capital Gains Tax (CGT) is a tax levied on the profit you make when you sell a capital asset — such as property, stocks, bonds, gold, or mutual fund units — for more than its purchase price. The profit, known as a capital gain , is the difference between the sale price and the purchase price (also called the cost of acquisition). You don’t pay tax when you own an asset — the tax only applies when you sell it and realize a profit. For example: If you bought shares worth ₹1,00,000 and sold them later for ₹1,50,000, the ₹50,000 gain is your capital gain , and you’ll be taxed on it depending on the type of asset and the holding period. TYPES OF CAPITAL GAINS The government differentiates between short-term and long-term capital gains based on how long you hold the asset before selling it. Short-Term Capital Gains (STCG) These arise when an asset is sold within a short period — typically: For listed equity shares or equity mutual funds: held less than 12 months . F...
Post a Comment
Read more

Know Your Terms : Net Asset Value

At its core, Net Asset Value (NAV) is the per-unit value of a mutual fund scheme . Think of it as the price tag of one unit of a mutual fund. Mathematically, NAV is calculated as: NAV= Total Assets – Total LiabilitiesNumber of Units Outstanding\text{NAV}= \frac{\text{Total Assets– Total Liabilities}}{\text{Number of Units Outstanding}} T otal Assets include the value of the securities held (like stocks, bonds, money market instruments), cash, and receivables. Liabilities cover expenses and obligations of the fund. Dividing the net figure by the total number of units gives the NAV per unit. For example, if a fund’s total assets are worth ₹100 crore and liabilities are ₹5 crore, the net assets equal ₹95 crore. If the fund has 10 crore units, the NAV would be: 95 crore10 crore=₹9.5\frac{95 \, \text{crore}}{10 \, \text{crore}} = ₹9.5 So, the NAV per unit is ₹9.5. v   WHY IS NAV IMPORTANT?   1.      Determines ...
Post a Comment
Read more

Know Your Terms : Internal Rate of Return

The Internal Rate of Return (IRR) is the discount rate that makes the Net Present Value (NPV) of all cash flows from an investment equal to zero . In simpler words, it’s the rate of return at which the money you invest breaks even with the cash inflows you receive over time. Mathematically, it solves the following equation: 0=NPV=∑Ct(1+IRR)t−C00 = NPV = \sum \frac{C_t}{(1+IRR)^t} - C_0 Where: ·        CtC_t = Cash inflow at time t ·        C0C_0 = Initial investment ·        tt = Time period The higher the IRR, the more attractive the investment. v   WHY IS IRR IMPORTANT?   1.      Profitability Indicator : IRR provides a clear benchmark to decide whether an investment is worth pursuing. If IRR is higher than the required rate of return (also called hurdle rate), the investment is attractive. 2.      Comparative Tool : Busines...
Post a Comment
Read more