Time Value of Money with Compounding | Python for Beginners | Quantra Free Course
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00:00 - 01:11 - Compounding
01:12 - 01:43 - Formula for compounding
Welcome to this unit. In this video unit, we will discuss compounding. Compounding requires period payments on investment, which are invested again.
For example, assume that the 5% annual interest rate bond makes semiannual payments. That is, for an investment of $1000, you will get $25 after first 6 months.
The rate of interest for first six months is 5% divided by 2, that is 2.5%, hence you get $25.
For compounding effects, you would require to reinvest these $25 for the next six months.
At the end of second half yearly period, you would earn an interest of $1025 * 2.5% that is $25.625, giving you an overall future value of $1025 + $25.625 that is $1050.625.
Note, how you ended up earning $0.625 more in case of compounding for the same annual interest rate of 5%.
An easy way to calculate the effect of compounding or interest earned on interest payments is to use this formula given below:
Future Value = Present Value * (1 + r/n) n*t Here: ‘r’ is the annual rate of interest earned and ‘n’ is the period of compounding. For example: n is equal to 2 in case of semiannual payments, 4 in case of quarterly payments and so on. In the upcoming IPython notebook, we will use these TVM concepts and code them in Python.
Further, we will solve a few problems on TVM. In the upcoming PDF unit let us plan a Systematic Investment Planning for your retirement using TVM concepts.
So, stay tuned.
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