Compound Interest

Zrinka Lukač ()
Additional contact information
Zrinka Lukač: University of Zagreb, Faculty of Economics & Business

Chapter 25 in Economic Analysis Through Mathematics, 2026, pp 553-585 from Springer

Abstract: Abstract Compound interest is the most widely used form of interest in business transactions. Here, the interest earned in one period also earns interest in the following period. Therefore, the speed of accumulation over time is much faster than that of simple interest. We start by deriving the fundamental compound interest formula, and then we discuss what to do if the interest conversion period does not coincide with the nominal interest rate. We show how to compute equivalent interest rate and effective interest rate. Next, we consider continuous compounding, that is, what happens if the number of interest conversion periods grows to infinity. One of the common problems in business practice is to find the principal P which accumulates to an amount S. Therefore, we consider discounted value, both for the case of discretely and continuously compounded interest. Then we show how to find the rate (given principal P, accumulated value S, and time n), as well as how to find time (given principal P, accumulated value S, and interest rate i). We conclude the chapter by showing how to compare cash flows due at different date, which leads us to the concept of equivalent amounts and equations of value.

Keywords: Compound interest; Conversion period; Fundamental compound interest formula; Accumulation factor; Nominal interest rate; Frequency of conversion; Annual effective interest rate; Effective interest rate per period; Geometric mean rate of return; Continuous compounding; Force of interest; Discounted value; Finding rate; Finding time; Equivalent amounts; Equations of value (search for similar items in EconPapers)
Date: 2026
References: Add references at CitEc
Citations:

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:sptchp:978-3-032-08812-3_25

Ordering information: This item can be ordered from
http://www.springer.com/9783032088123

DOI: 10.1007/978-3-032-08812-3_25

Access Statistics for this chapter

More chapters in Springer Texts in Business and Economics from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().