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Compound interest |
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Definition of Compound interestCompound interestinterest paid on previously earned interest as well as on the principal. Compound Interestinterest paid on principal and on interest earned in previous compound interesta method of determining interest in which interest that was earned in prior periods is added to the original investment so that, in each successive period, interest is earned on both principal and interest compound interestinterest earned on interest. Compound Interestinterest earned on an investment at periodic intervals and added to principal and previous interest earned. Each time new interest earned is calculated it is on a combined total of principal and previous interest earned. Essentially, interest is paid on top of interest.
Related Terms:Effective annual yieldAnnualized interest rate on a security computed using compound interest techniques. Interest on interestinterest earned on reinvestment of each interest payment on money invested. Simple interestinterest calculated only on the initial investment. Related:compound interest. Future valueThe value that a sum of money (the present value) earning effective annual interest rateinterest rate that is annualized using compound interest. Interest FactorNumbers found in compound interest and annuity tables. Usually called the FVIF or PVIF. fractional interest discountthe combined discounts for lack of control and marketability. g the constant growth rate in cash flows or net income used in the ADF, Gordon model, or present value factor. Accrued interestThe accumulated coupon interest earned but not yet paid to the seller of a bond by the Amortizing interest rate swapSwap in which the principal or national amount rises (falls) as interest rates Base interest rateRelated: Benchmark interest rate. Benchmark interest rateAlso called the base interest rate, it is the minimum interest rate investors will Best-interests-of-creditors testThe requirement that a claim holder voting against a plan of reorganization Capitalized interestinterest that is not immediately expensed, but rather is considered as an asset and is then Cash flow after interest and taxesNet income plus depreciation. Compound optionOption on an option. CompoundingThe process of accumulating the time value of money forward in time. For example, interest Compounding frequencyThe number of compounding periods in a year. For example, quarterly Compounding periodThe length of the time period (for example, a quarter in the case of quarterly Continuous compoundingThe process of accumulating the time value of money forward in time on a Covered interest arbitrageA portfolio manager invests dollars in an instrument denominated in a foreign Discrete compoundingcompounding the time value of money for discrete time intervals. Earnings before interest and taxes (EBIT)A financial measure defined as revenues less cost of goods sold Effective annual interest rateAn annual measure of the time value of money that fully reflects the effects of Equilibrium rate of interestThe interest rate that clears the market. Also called the market-clearing interest Forward interest rateinterest rate fixed today on a loan to be made at some future date. Gross interestinterest earned before taxes are deducted. InterestThe price paid for borrowing money. It is expressed as a percentage rate over a period of time and Interest coverage ratioThe ratio of the earnings before interest and taxes to the annual interest expense. This Interest coverage testA debt limitation that prohibits the issuance of additional long-term debt if the issuer's Interest equalization taxTax on foreign investment by residents of the U.S. which was abolished in 1974. Interest paymentsContractual debt payments based on the coupon rate of interest and the principal amount. Interest-only strip (IO)A security based solely on the interest payments form a pool of mortgages, Treasury Interest rate agreementAn agreement whereby one party, for an upfront premium, agrees to compensate the Interest rate capAlso called an interest rate ceiling, an interest rate agreement in which payments are made Interest rate ceilingRelated: interest rate cap. Interest rate floorAn interest rate agreement in which payments are made when the reference rate falls Interest rate on debtThe firm's cost of debt capital. Interest rate parity theoreminterest rate differential between two countries is equal to the difference Interest rate riskThe risk that a security's value changes due to a change in interest rates. For example, a Interest rate swapA binding agreement between counterparties to exchange periodic interest payments on Interest subsidyA firm's deduction of the interest payments on its debt from its earnings before it calculates Interest tax shieldThe reduction in income taxes that results from the tax-deductibility of interest payments. Nominal interest rateThe interest rate unadjusted for inflation. Open interestThe total number of derivative contracts traded that not yet been liquidated either by an Pooling of interestsAn accounting method for reporting acquisitions accomplished through the use of equity. Rate of interestThe rate, as a proportion of the principal, at which interest is computed. Real interest rateThe rate of interest excluding the effect of inflation; that is, the rate that is earned in terms Realized compound yieldYield assuming that coupon payments are invested at the going market interest Short interestThis is the total number of shares of a security that investors have borrowed, then sold in the Simple compound growth methodA method of calculating the growth rate by relating the terminal value to Spot interest rateinterest rate fixed today on a loan that is made today. Related: forward interest rates. Stated annual interest rateThe interest rate expressed as a per annum percentage, by which interest Times-interest-earned ratioEarnings before interest and tax, divided by interest payments. True interest costFor a security such as commercial paper that is sold on a discount basis, the coupon rate Earnings before interest and taxes (EBIT)The operating profit before deducting interest and tax. Earnings before interest, taxes, depreciation and amortization (EBITDA)The operating profit before deducting interest, tax, depreciation and amortization. InterestThe cost of money, received on investments or paid on borrowings. Profit before interest and taxes (PBIT)See EBIT. Interest incomeIncome that a company receives in the form of interest, usually as the result of keeping money in interest-bearing accounts at financial institutions and the lending of money to other companies. Interest payableThe amount of interest that is owed but has not been paid at the end of a period. earnings before interest and income tax (EBIT)A measure of profit that times interest earnedA ratio that tests the ability of a business to make Accrued InterestThe amount of interest accumulated on a debt security between Continuous CompoundingThe process of continuously adding interest to a principal plus Discrete CompoundingThe process of adding interest to a principal plus interest amount Effective Interest RateThe rate of interest actually earned on an investment. It is Nominal Interest RateThe rate of interest quoted, or stated, to be paid on a security Real Interest RateThe rate of interest paid on an investment adjusted for inflation Simple Interestinterest paid only on the principal; calculated by multiplying the Times Interest Earned RatioA measure of how well a company is able to meet its interest compounding periodthe time between each interest computation simple interesta method of determining interest in which interest is earned only on the original investment (or principal) amount InterestThe cost of funds loaned to an entity. It can also refer to the equity ownership Pooling of interestsAn method for accounting for a business combination. When used, the expenses of the combination are charged against income at once, and the net interest rate parityTheory that forward premium equals interest rate differential. interest tax shieldTax savings resulting from deductibility of interest payments. nominal interest rateRate at which money invested grows. real interest rateRate at which the purchasing power of an investment increases. simple interestinterest earned only on the original investment; no interest is earned on interest. Interest Rate DifferentialThe interest rate on our financial assets minus the interest rate on a foreign country's financial assets. Interest Rate, NominalPayment for the use of borrowed funds, measured as a percentage per year of these funds. Interest Rate ParityTheory that real interest rates are approximately the same across countries except for a risk premium. Interest Rate, RealNominal interest rate less expected inflation. Money Rate of InterestSee interest rate, nominal. Real Rate of InterestSee interest rate, real. Term Structure of Interest RatesRelationship among interest rates on bonds with different terms to maturity. Capitalized Interestinterest incurred during the construction period on monies invested in Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)An earningsbased measure that, for many, serves as a surrogate for cash flow. Actually consists of working Insurable InterestIn England in the 1700's it was popular to bet on the date of death of certain prominent public figures. Anyone could buy life insurance on another's life, even without their consent. Unfortunately, some died before it was their time, dispatched prematurely in order that the life insurance proceeds could be collected. In 1774, English Parliament passed a law which restricted the right to be a beneficiary on a life insurance contract to those who would suffer an economic loss when the life insured died. The law also provided that a person has an unlimited insurable interest in his own life. It is still a legal stipulation that an insurance contract is not valid unless insurable interest exists at the time the policy is issued. Life Insurance companies will not, however, issue unlimited amounts of coverage to an individual. The amount of life insurance which will be approved has to approximate the loss caused by the death of the individual and must not result in a windfall for the beneficiary. Accrued InterestThe amount of interest owing but not paid. Fixed Interest RateA rate that does not fluctuate with general market conditions. Floating Interest RateA rate that fluctuates with general market condition. InterestA charge for the use of money supplied by a lender. Interest RateCost of using money, expressed as a rate per period of time, usually one year. Interest Rate RiskPossibility that interest rates will rise during the term of a loan thereby increasing the annual cost of borrowing.
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