Rule 69 and 72, EIR, Prepetuity, computation of interest class is for the HSC candidates or for the students of classes 11 and 12. This class is a part of HSC (11-12) [ এইচএসসি (১১-১২) ], Finance and Banking 1st paper. You can find it in the Finance 1st Paper, chapter 3, the topic name is “Rule 69 & 72, EIR, Prepetuity, computation of interest. This class will help you in your upcoming HSC examination.
Rule 69 and 72, EIR, Prepetuity, computation of interest
Rule 69 and 72
Rule Of 69 Explained
The rule of 69 is a method widely used to calculate how long it will take for the invested amount to get doubled in value. The calculation does not give an accurate answer, but rather just an estimate of time. Therefore rule of 69 in finance is suitable to get an idea, and not for final decision making, especially if the investment involves a huge sum of money.
It is better to understand first that before applying rule 69, check whether the security or case on which we are applying the model is compound on a regular basis or have a different pattern. There is a category between 69 to 72 for the denominator part. As the continuous compounding decrease to become normal compounding, we shift from rule 69 to rule 72.
It can be said that the time required to make the investment double is inversely proportionate to the interest rate, so if the interest rate is increased, then there will be less time required to make it double. It should always be kept in mind that the answer provides hereby is not the exact answer, so it needs to cover only the cases where the just a normal side by the figure requires not the exact time.
It is used only for the financial items which are using the continuous compounding interest rate as the compounding form, So not applicable generally on loan given by banks to the customer (Compound interest is applied in that case) or unsecured loan is given or taken from others. (Simple interest is applied).
This formula works only in the condition where the interest rate does not change in between, i.e., a similar rate throughout the period; otherwise, the result can deviate from the result obtained using this rule.
People are concerned with the investment horizon only if the amount involved herewith is huge in size. If required dedicated complexity calculative sheet to determine so not reliable for those projects, and even the little change in a variable can have a serious impact on deciding whether to do the project or not, so not worthy of using it.
Rule Of 69 Vs Rule Of 72
Both the above are used by investors to calculate or estimate the possible time period within which the investment amount will increase. But there are some differences between them as follows:
- The former is used for any rate of interest whereas the latter is used mainly in case the interest is non-continuous.
- In case the rate of interest is increasing then the former will give a more precise or clearer answer than the latter.
Thus, even though both the concepts amy appear to be similar in nature, there are some differences as give above. But both are equally important and useful and are commonly used by accountants and financial planners who deal with investment decisions.
