Chapter 2
The Power of Compound Interest, Perpetual Bonds and Discount Bonds
Compound interest at high rates is one of the most potent growth forces in our investment markets. The rate of compounding, of course, is crucial. Capital left at semiannual compound interest of 4 percent (tax free) will double every 17.5 years, at 6 percent every 11.7 years, at 8 percent every 8.8 years and at 10 percent every 7.1 years.
Compounding occurs not only in fixed income investments, but also in the compounding of retained earnings by business enterprises. The key uncertainty in both types of investment is the rate at which future coupon receipts or future retained earnings can be reinvested. The business concern has to expand rapidly and profitably in order ...
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