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Chapter 3





                           Compounding and discounting





               2.1 Compounding

               A sum invested today will earn interest.  Compounding calculates the future (or
               terminal) value of a given sum invested today for a particular time period at a
               particular rate of interest.

               It assumes that interest is earned not just on the initial investment amount but also on
               interest already earned.

               Formula for compounding:

                             F = P(1+r) n        F = Future value

                                                 P = Initial investment (present value)


                                                 r = Interest rate

                                                 n = number of time periods











































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