8.6 Interest-on-Interest
Here is a more detailed way to view the foregoing. Can you explain the algorithm? Here we use a coupon payment of $40 rather than just the $4 payment as above.
| Period | Coupon Cash Flow (C) | Interest-on-Interest (I) | Total Cash Flow (C + I) |
|---|---|---|---|
| 1 | 40 | 40.00 | |
| 2 | 40 | 40 (.03) = 1.20 = | 41.20 |
| 3 | 40 | 40 (.03) + 1.20 (1.03) = 1.20 + 1.24 = | 42.44 |
| 4 | 40 | 40 (.03) + 2.44 (1.03) = 1.20 + 2.51 = | 43.71 |
| 5 | 40 | 40 (.03) + 3.71 (1.03) = 1.20 + 3.82 = | 45.02 |
| 6 | 40 | 40 (.03) + 5.02 (1.03) = 1.20 + 5.17 = | 46.37 |
| 7 | 40 | 40 (.03) + 6.37 (1.03) = 1.20 + 6.56 = | 47.76 |
| 8 | 40 | 40 (.03) + 7.76 (1.03) = 1.20 + 7.99 = | 49.19 |
| 9 | 40 | 40 (.03) + 9.19 (1.03) = 1.20 + 9.47 = | 50.67 |
| 10 | 40 | 40 (.03) + 10.67 (1.03) = 1.20 + 10.99 = | 52.19 |
| 11 | 40 | 40 (.03) + 12.19 (1.03) = 1.20 + 12.55 = | 53.75 |
| 12 | 40 | 40 (.03) + 13.75 (1.03) = 1.20 + 14.16 = | 55.36 |
| 13 | 40 | 40 (.03) + 15.36 (1.03) = 1.20 + 15.82 = | 57.02 |
| 14 | 40 | 40 (.03) + 17.02 (1.03) = 1.20 + 17.54 = | 58.74 |
| Total | 560 | 123.42 | 683.42 |
