Financial Terms Glossary

CAGR - Compound Annual Growth Rate

Formal

Stands for 'Compound Annual Growth Rate' - and is used in investment appraisal. It's the effective annual interest or return rate that the investment delivers. Imagine if $100 today becomes worth $110 in one year's time - then the CAGR is 10%. The original $100 has grown at a rate of 10% in that one year. Imagine if the same $100 is worth $121 in two year's time - then the CAGR is still 10% because the original $100 has grown at a compound rate of 10%. This is calculated as follows:- $100*10% for year 1 = $10 plus the ($100 + $10) * 10% for year 2 = $11. Total $100 + $10 + $11 = $121.

Informal

Another killer topic for parties - not! It's just another fancy name for an interest rate or return rate that accumulates over time and is quoted as an annual percentage. It's like the rate of interest on a loan - the amount grows and 'rolls up' if you don't pay off some of the capital - so the charge rate 'compounds' just like in compound interest. So it's not that difficult - just think of it as a clever term for an accumulating interest rate.

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