Interest-On-Interest

AAA

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.

RELATED TERMS
  1. Yield To Maturity (YTM)

    The rate of return anticipated on a bond if held until the maturity ...
  2. Coupon

    The interest rate stated on a bond when it's issued. The coupon ...
  3. Maturity

    The period of time for which a financial instrument remains outstanding. ...
  4. Bond

    A debt investment in which an investor loans money to an entity ...
  5. Total Return

    When measuring performance, the actual rate of return of an investment ...
  6. Average Balance

    The balance on a loan or depositary account. A simple average ...
Related Articles
  1. How does the money from the interest ...
    Investing

    How does the money from the interest ...

  2. Advanced Bond Concepts
    Bonds & Fixed Income

    Advanced Bond Concepts

  3. Introduction To Commercial Paper
    Bonds & Fixed Income

    Introduction To Commercial Paper

  4. Projected Returns: Honing The Craft
    Retirement

    Projected Returns: Honing The Craft

comments powered by Disqus
Hot Definitions
  1. Walras' Law

    An economics law that suggests that the existence of excess supply in one market must be matched by excess demand in another ...
  2. Market Segmentation

    A marketing term referring to the aggregating of prospective buyers into groups (segments) that have common needs and will ...
  3. Effective Annual Interest Rate

    An investment's annual rate of interest when compounding occurs more often than once a year. Calculated as the following: ...
  4. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  5. Odious Debt

    Money borrowed by one country from another country and then misappropriated by national rulers. A nation's debt becomes odious ...
  6. Takeover

    A corporate action where an acquiring company makes a bid for an acquiree. If the target company is publicly traded, the ...
Trading Center