Asked by Elorah Stoner on Jun 09, 2024
Verified
At an interest rate of 10% and using the Rule of 72, how long will it take to double the value of a lump sum invested today? How long will it take after that until the account grows to four times the initial investment? Given the power of compounding, shouldn't it take less time for the money to double the second time?
Rule Of 72
A simple formula used to estimate the number of years required to double the invested money at a given annual rate of return, by dividing 72 by the expected rate of interest.
Compounding
Compounding refers to the process by which the value of an investment increases because the earnings on an investment, both capital gains, and interest, earn interest as time passes.
- Understand the Rule of 72 and its application in estimating the time required for an investment to double.
- Comprehend how compounding frequency impacts the growth of investments.
Verified Answer
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faker fakercdeJun 15, 2024
Final Answer :
It will take 7.2 years to double the initial investment, then another 7.2 years to double it again. That is, it takes 14.4 years for the value to reach four times the initial investment. Compounding doesn't affect the amount of time it takes for an investment to double the second time, but note that during the first 7.2 years, the interest earned is equal to 100% of the initial investment. During the second 7.2 years, the interest earned is equal to 200% of the initial investment. That is the power of compounding.
Learning Objectives
- Understand the Rule of 72 and its application in estimating the time required for an investment to double.
- Comprehend how compounding frequency impacts the growth of investments.