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Interest Compounding Frequency And Its Effect On Maturity:


In general,there is tradition of calculating returns in terms of compounded per annum basis.But there are number of other instruments which offers compounding frequency over monthly,quarterly,half yearly and yearly basis.We will try to evaluate effect of compounding frequency on maturity amount,considering remaining factors to be same.

E.g. Mr A want to invest Rs 1 lakh for 10 yrs.We will calculate maturity value with 10% returns and different compounding frequency.It can be presented in tabular form as below.

Compounded Monthly:

Capital Invested(Rs) Assumed Returns Compounding frequency Maturity value(Rs)
1,00,000 10% Monthly 2,70,405

Compounded quarterly:

Capital Invested(Rs) Assumed Returns Compounding frequency Maturity value(Rs)
1,00,000 10% Quarterly 2,68,506

Compounded Half-yearly:

Capital Invested(Rs) Assumed Returns Compounding frequency Maturity value(Rs)
1,00,000 10% Half-yearly 2,65,330

Compounded Annually:

Capital Invested(Rs) Assumed Returns Compounding frequency Maturity value(Rs)
1,00,000 10% Annually 2,59,375

 

If we compare maturity amounts across all above cases then we do not find much difference considering period of 10 yrs,but it may be considerable if returns are higher,amount invested is much more or term is longer.


Category: Fixed Income

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