What is compounding? What is discounting?

Expert Solution

When you deposit money in the bank, the bank pay you interest on the deposit that is the opportunity cost of you deposit. The interest is calculated by two method, simple method and compounding method.

In simple method the interest is calculated using below formula (Principle * interest * time)

In compounding method interest is calculated using below formula = P (1 + interest) ^N

In compounding method the interest earned will become principle and that will earn more interest.

Compounding is done annually, semi-annually, quarterly, monthly , daily or continuously.

However if we know the future value of an amount, and we are required to find the present value of that amount then we will need to discount the amount using interest rate and time period

PV = FV/ (1 + interest)ⁿ

jeff jeffy answered 2 years ago

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What is compounding? What is discounting?

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