Compounding

Earning interest on previously earned interest. With continuous compounding, a sum grows by the exponential of rate times time.

Where you will meet it

Compounding comes up in 34 learning outcome notes across the FRM syllabus. A few of them:

• Introduction to Derivatives
  FRM Part I · Financial markets and products

  “Here S is the spot price, r the annual risk-free rate with annual compounding and T the time in years.”

• Non-Stationary Time Series
  FRM Part I · Quantitative analysis

  “Its slope β₁ is the continuously compounded growth rate.”

• Interest Rates
  FRM Part I · Valuation and risk models

  “A quoted interest rate is meaningless until you know its compounding frequency.”

• Arbitrage Pricing with Term Structure Models
  FRM Part II · Market risk measurement and management

  “Discounting must use the step's own compounding, for example r÷12 for a monthly step.”

All terms beginning with C · FRM glossary

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