# Question: What is the relationship between compounding and discounting of a lump sum?

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Compounding converts the present value into future value and discounting converts the future value into present value.

## What is the relationship between compounding and the future value of an amount?

Compound Interest = total amount of principal and interest in future (or future value) less the principal amount at present, called present value (PV). PV is the current worth of a future sum of money or stream of cash flows given a specified rate of return.

How is the compounding process related to the payment of interest on savings? It is the amount of interest EARNED on a given deposit so it becomes part of the principal, which is the amount of money on which the interest is PAID. … A decrease in the interest rate would result in a decrease of the future value.

## What is the relationship between discounting and compounding?

The concept of compounding and discounting are similar. Discounting brings a future sum of money to the present time using discount rate and compounding brings a present sum of money to future time.

## What happens if you compound more frequently than annually?

This means that if you invest \$100 at 8% compounded continually, your effective rate is approximately 8.33% (after one year, \$100 becomes \$108.3288).

1.2. 2 Compounding More Frequently Than Annually.

FV = PV*ei*n (where e is the exponential function, 2.7183)
FV future value at the end of period
PV the present value (or initial principal)

## How do you calculate interest per year?

The principal amount is Rs 10,000, the rate of interest is 10% and the number of years is six. You can calculate the simple interest as: A = 10,000 (1+0.1*6) = Rs 16,000. Interest = A – P = 16000 – 10000 = Rs 6,000.

## How do I calculate interest?

Use this simple interest calculator to find A, the Final Investment Value, using the simple interest formula: A = P(1 + rt) where P is the Principal amount of money to be invested at an Interest Rate R% per period for t Number of Time Periods. Where r is in decimal form; r=R/100; r and t are in the same units of time.

## What is the lump sum formula?

The formula to calculate compound interest for a lump sum is A = P (1+r/n)^nt where A is future value, P is present value or principal amount, r is the interest rate, t is the number of years the money is deposited for and n is the number of periods the interest is compounded each year. Gather your information.

## Which is better compounded annually or semiannually?

Regardless of your rate, the more often interest is paid, the more beneficial the effects of compound interest. A daily interest account, which has 365 compounding periods a year, will generate more money than an account with semi-annual compounding, which has two per year.

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## What is the purpose of discounting?

Discounting is the process of determining the present value of a payment or a stream of payments that is to be received in the future. Given the time value of money, a dollar is worth more today than it would be worth tomorrow. Discounting is the primary factor used in pricing a stream of tomorrow’s cash flows.

## What is discount rate in compound interest?

The difference between the value of an amount in the future and its present discounted value. For example, if £100 in five years’ time is worth £88 now, the compound discount will be £12. The compound discount will depend upon the discount rate applied. 