Simple &amp; Compound Interest

# Simple &amp; Compound Interest - F at end of year 1 is...

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Simple Interest is a historical concept whereby interest is calculated only on the original principal borrowed. Compound Interest , in widespread use today, bases the interest calculation on the original principal borrowed plus any accrued interest from prior periods.

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Simple Interest Interest earned on original principal only I = i * P * N F = P + I F = P + (i * P * N) or F = P(1 + iN) Example: \$100 @ 10% per year for 2 years F = \$100(1 + 10% * 2) = \$120 \$100 @ 10% per year for 20 years F = \$100(1 + 10% * 20) = \$300
Compound Interest Example: \$100 @ 10% per year compounded annually for 2 years F @ end Year 1 = P (1 + i) = \$100 * (1 + 10%) = \$110

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Unformatted text preview: F at end of year 1 is P at beginning of Year 2 F @ end Year 2 = P (1 + i) * (1 + i) = \$110 (1 + 10%) or Combining Terms: F = P (1 + i) 2 F @ end Year 2 = \$100 (1 + 10%) 2 = \$121.00 What is the balance in 20 years? Yr 1 Yr 2 … Yr 20 F @ end of year 20 = \$100(1+10%)(1+10%)…(1+10%) F @ end of Year 20 = \$100 (1 + 10%) 20 = \$672.75 Compound Interest – Cont’d For any number of Periods N: F = P (1 + i) N [(1 + i) N ] is known as the “Compound Amount Factor” Solving for P we obtain: P = F (1 + i)-N [(1 + i)-N ] is known as the “Discount Factor” or “Present Worth Factor”...
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Simple &amp; Compound Interest - F at end of year 1 is...

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