Читать книгу Fundamentals of Financial Instruments - Sunil K. Parameswaran - Страница 79

Alex Gunning deposited $25,000 with International Bank for four years and nine months. The bank has been paying interest at the rate of 8% per annum on a compound interest basis. Let us calculate the terminal balance.

In the earlier case, when we assumed simple interest, we got a value of $34,500.

As can be seen from the examples, compounding yields substantially greater benefits than simple interest. And since the rate of interest is taken to the power of N, the larger the value of N, the greater will be the impact of compounding. In other words, the earlier one starts investing, the greater will be the returns.