Rule of 72

Definition:

A formula used to determine the amount of time it will take for invested money to double at a given compound interest rate, which is 72 divided by the interest rate. The logic is as follows. The time for an amount A to double is given by 2A=A(1+i)^t where ^ represents exponent and i is the interest rate, e.g. .05 is 5%. The A term cancels from both sides of the question. Solve for t by taking the natural log of both sides of the equation. Hence, t= [ln(2) over {ln(1+i)}], which is approximately equal to 0.72 over i. Hence the rule of 72.

Investing Essentials


Copyright © 2011 Campbell R. Harvey, Professor of Finance, Fuqua School of Business at Duke University

Term of the Day

Ratio Strategy

A strategy in which one has an unequal number of long secruities and short sercurities. Normally, it implies a preponderance of short options over either long options or long stock.

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