Financial Terms | |
Compounding |
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Definition of CompoundingCompoundingThe process of accumulating the time value of money forward in time. For example, interest compoundingWhen an asset generates earnings that are then reinvested and generate their own earnings.
Related Terms: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 compounding periodthe time between each interest computation Continuous compoundingThe process of accumulating the time value of money forward in time on a Continuous CompoundingThe process of continuously adding interest to a principal plus Discrete compoundingcompounding the time value of money for discrete time intervals. Discrete CompoundingThe process of adding interest to a principal plus interest amount Annual percentage yield (APY)The effective, or true, annual rate of return. The APY is the rate actually DiscountingCalculating the present value of a future amount. The process is opposite to compounding. DiscountingThe process of finding the present value of a series of future cash flows. Discounting is the reverse of compounding. Effective annual interest rateAn annual measure of the time value of money that fully reflects the effects of Effective rateA measure of the time value of money that fully reflects the effects of compounding. NominalIn name only. Differences in compounding cause the nominal rate to differ from the effective
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