A useful rule of thumb for the time it takes an investment to double with discrete compounding
Question:
A useful rule of thumb for the time it takes an investment to double with discrete compounding is the “Rule of 72.” To use the Rule of 72, you simply divide 72 by the interest rate to determine the number of periods it takes for a value today to double. For example, if the interest rate is 6 percent, the Rule of 72 says it will take 72/6 = 12 years to double. This is approximately equal to the actual answer of 11.90 years. The Rule of 72 can also be applied to determine what interest rate is needed to double money in a specified period. This is a useful approximation for many interest rates and periods. At what rate is the Rule of 72 exact?
Compounding is the process in which an asset's earnings, from either capital gains or interest, are reinvested to generate additional earnings over time. This growth, calculated using exponential functions, occurs because the investment will...
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Corporate Finance
ISBN: 978-0077861759
10th edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe