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Albert Einstein Called Compound Interest "The 8th Wonder Of The World." An Example Of Mathematics And Compound Interest 0 comments

May 23, 2013 8:25 AM

Albert Einstein called compound interest,

"The 8th wonder of the world"

Mathematics and Compound Interest

WHEN DOES 5.25 = 8.9 = 14.83?

$1,000,000 invested @ 5.25% compound interest, for 20 years, becomes $2,782,542.

$1,782,542 annual profit over 20 years = $89,127.

$89,127 per year is actually 8.9% per year (simple nominal interest.)

What if that 8.9% yield is tax free?

The taxable equivalent yield of 8.9% (40% tax bracket) = 14.833%.

"0" coupon bonds are available in the marketplace that offer 5.25% (or more) tax free rates of return such as those described herein. "0" coupon bonds offer a way to invest and compound at a stated rate for a specific period of time. The bonds can be sold at anytime...for a profit if rates stay the same or go down...for a loss if rates go up and the bonds are not held long enough for the accreted value to make up for the loss. Some issuers may see a ratings change that could alter the value of their debt up or down relative to other securities with like qualities.

So how did we get 5.25% to 14.833% ? Simple, compound interest.

The risks? Interest rate and credit risk, of course, albeit...what investments have generated 9% over a long time frame? Not many.

If held for a long enough time, the chances of losing any money at the 5.25% level defaults to "0".

Can we find tax free zero coupon bonds that offer 5.25% yield to maturity for 20 years and at the same time carry "stable" ratings by all three services of Aa3/AA-/AA- ??? The answer is yes...at least we can as of this writing.

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## Albert Einstein Called Compound Interest "The 8th Wonder Of The World." An Example Of Mathematics And Compound Interest 0 comments

Albert Einstein called compound interest,"The 8th wonder of the world"Mathematics and Compound InterestWHEN DOES 5.25 = 8.9 = 14.83?$1,000,000 invested @ 5.25% compound interest, for 20 years, becomes $2,782,542.

$1,782,542 annual profit over 20 years = $89,127.

$89,127 per year is actually 8.9% per year (simple nominal interest.)

What if that 8.9% yield is tax free?

The taxable equivalent yield of 8.9% (40% tax bracket) = 14.833%.

"0" coupon bonds are available in the marketplace that offer 5.25% (or more) tax free rates of return such as those described herein. "0" coupon bonds offer a way to invest and compound at a stated rate for a specific period of time. The bonds can be sold at anytime...for a profit if rates stay the same or go down...for a loss if rates go up and the bonds are not held long enough for the accreted value to make up for the loss. Some issuers may see a ratings change that could alter the value of their debt up or down relative to other securities with like qualities.

So how did we get 5.25% to 14.833% ? Simple, compound interest.

The risks? Interest rate and credit risk, of course, albeit...what investments have generated 9% over a long time frame? Not many.

If held for a long enough time, the chances of losing any money at the 5.25% level defaults to "0".

Can we find tax free zero coupon bonds that offer 5.25% yield to maturity for 20 years and at the same time carry "stable" ratings by all three services of Aa3/AA-/AA- ??? The answer is yes...at least we can as of this writing.

Peace.

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