Page 36 - DMGT515_PERSONAL_FINANCIAL_PLANNING

Unit 2: Time Value of Money

2.7 Doubling Period Notes

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
Illustration 19

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 20
Take the above problem as it is and calculate doubling period.
Solution:
D = 0.35 + 69 / 10 = 7.25 years.
p
2.8 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
Illustration 21
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.

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