Page 33 - DMGT207_MANAGEMENT_OF_FINANCES

Management of Finances

Notes Doubling Period

Doubling period is the time required, to double the amount invested at a given rate of interest.
For example, if you deposit 10,000 at 6 per cent interest, and it takes 12 years to double the
amount. (See compound value for one rupee table at 6 per cent till you find the closest value
to 2).
Doubling period can be computed by adopting two rules, namely:

1. Rule of 72: To get doubling period 72 is divided by interest rate.
Doubling period (D ) = 72  I
p
Where,
I = Interest rate.

D = Doubling period in years.
p
Example: If you deposit 500 today at 10 per cent rate of interest, in how many years will
this amount double?
Solution:
D = 72  I = 72  10 = 7.2 years (approx.)
p
2. Rule of 69: Rule of 72 may not give the exact doubling period, but rule of 69 gives a more
accurate doubling period. The formula to calculate the doubling period is:
D = 0.35 + 69/I
p
Illustration: Take the above problem as it is and calculate doubling period.
Solution:
D = 0.35 + 69/10 = 7.25 years.
p
Effective Rate of Interest in Case of Doubling Period

Sometimes investors may have doubts as to what is the effective interest rate applicable, if a
financial institute pays double amount at the end of a given number of years.
Effective rate of interest can be defined by using the following formula.
(a) In case of rule of 72
ERI = 72 per cent Doubling period (D )
p
where,
ERI = Effective rate of interest.
D = Doubling period.
p

Example: A financial institute has come with an offer to the public, where the institute
pays double the amount invested in the institute by the end of 8 years. Mr. A, who is interested
to make a deposit, wants to know the affective rate of interest that will be given by the institute.
Calculate:

Solution:
ERI = 72  D = 72 8 years = 9 per cent
p

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