Compounding

Compounding is one of the method used to obtain the future value of money. This method is adopted when an investment is made on installment basis like Investing every quarter, month or half yearly.

Every time any compounding is taking place, the following line of action has to be adopted for the determination of the future value of money.

Future Value of Money = PV(1+k/m)^(m*n)

Where,
PV= Initial investment value
m = Number of Times Compounding is done during the year
n = Number of years
k = compounding rate

For example:

Mr. X deposits Rs. 5,00,000 four time a year for 6 years at 12% nominal rate of interest.

The future value of Rs. 5,00,000 will be

= Rs.5,00,000(1+.12/4)^(4*6)

= Rs.5,00,000(2.033)= Rs.10,16,500.