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Compounding Interest

COMPOUNDING INTEREST 4

CompoundingInterest

CompoundingInterest

Partone

CompoundInterests affectthefuture value of particular investments significantly.It is good to note that, the positive influence of compounding doesnot impact some assetsfor instance stock. One makes revenue on the stockthrough the growth of capital which pushes the price up. Nonetheless,whether the savings involves corporate bonds or bank savings,interests boost one’s portfolio value.

Compoundinginterest frequently has an effecton the future value of the dollar.Cash always losevalue as time goes.It means that the future value of a dollar is much less than thepresent worth. Nonetheless, dailycompounding of interest can set back this devaluation. But it cannotcompensate for the weakening of the monetaryvalue within the given shortest period. Instead, it counteractsthe fall within anextended period.Contrary, when regularcompound rates are highthen theEffectiveAnnual Rate will also be high. The Effective Annual Rate is theinterest rate paid or earned on a loan, investment or any othermonetary item as a result of the compounding within a given period oftime. As a result, compounding the rates more frequently will lead tohigh accumulation of this rates compared to when compounding therates annually (TradeOnline , 2016).

Parttwo

AnnualInterest Rate refers to the regular interest rates for a loanwhen reproduced by agiven paymentphases each year. For instance, if one is charged 1% interest onthe credit card every month, multiplying the benefitby the number of months in a year it provides a nominal annualinterest rate of 12% yearly. On the other hand, Effective AnnualInterest rate puts into recognition the impact of compound interest,and it is vital for determining creditsthat composite interest at unvarying values, for example,daily or monthly. As mentioned, the annual interest rate for a creditcard that provides 1% interest monthly is 12%. For this case,every month that interest isappendedon one’s balance, then the individual must pay the interest forunpaid interest cost in the month that will follow (Robbinson,2016).

References

Robbinson,C. (2016). WhatAre the Differences Between APR and EAR?Retrieved from What Are the Differences Between APR and EAR?:http://www.fool.com/knowledge-center/what-are-the-differences-between-apr-ear.aspx

TradeOnline . (2016). DoesCompound Interest Affect the Future Value of an Investment?Retrieved from Finance :http://finance.zacks.com/compound-interest-affect-future-value-investment-10050.html