DEFINITION of 'InterestOnInterest'
The interest that is earned upon the reinvestment of interest payments. Interestoninterest is primarily used in the context of coupon paying bonds, where all coupon payments are assumed to be reinvested at some interest rate and held until the bond matures, or when the bond is sold.
INVESTOPEDIA EXPLAINS 'InterestOnInterest'
Interestoninterest is an important consideration an investor must make when analyzing potential investments, as interestoninterest must be considered when forecasting an investment's total cash return.
For simplification, the interest rate used to calculate interestoninterest can be the bond's yield at the time the coupon payment is made.
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