A further shortcoming of tables is evident when, for example, the interest rate or the compounding period is more complex (such as an interest rate of 10.375%, or a compounding period of 20 years, 7 months).
In this case the formula would be needed to arrive at the actual compounding period required.
Where each payment is made at the beginning of a compounding period (for example, at the beginning of each year), the process is known as an "annuity due" or an "annuity in advance."
The nominal rate may be used in a financial calculator because the calculator can automatically adjust for the compounding period (payment frequency).
In order for the TVM equation to be accurate, the rate needs to reflect the semi-monthly compounding period.
Frequently, financial planners and investors need to convert a rate quoted for one interval into an equivalent rate for another interval or to convert a rate determined for one compounding period into an equivalent rate for another compounding period.
For instance, most mortgages are generally paid monthly and the compounding period is also generally monthly.
The safe harbor interest rate is 150% of the highest AFR, at the appropriate compounding period
in effect at any time beginning when the right to the guaranteed payment for capital is first established through the end of the tax year.
On the other hand, Investopedia defines compound interest as interest calculated on the initial principal and also on the accumulated interest of previous periods of a deposit or loanThe rate at which compound interest accrues depends on the frequency of compounding; the higher the number of compounding periods
, the greater the compound interest.
This idea is used if the number of compounding periods
per year is infinitely high.
That is, no matter how many compounding periods
into which the year is divided, it will never exceed the value of 2.718282 07 = 1.072508.
Formula: [FV.sub.SS] = [PV.sub.SS] [(1 + i/m).sup.mn] [FV.sub.SS] = future value of a single sum [PV.sub.SS] = present value of a single sum i = interest rate (annual) m = number of compounding periods
n = number of years