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

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 least we can as of this writing.