Interest-On-Interest

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DEFINITION of 'Interest-On-Interest'

The interest that is earned upon the re-investment of interest payments. Interest-on-interest is primarily used in the context of coupon paying bonds, where all coupon payments are assumed to be re-invested at some interest rate and held until the bond matures, or when the bond is sold.

INVESTOPEDIA EXPLAINS 'Interest-On-Interest'

Interest-on-interest is an important consideration an investor must make when analyzing potential investments, as interest-on-interest must be considered when forecasting an investment's total cash return.

For simplification, the interest rate used to calculate interest-on-interest can be the bond's yield at the time the coupon payment is made.

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