Compound Interest

Compound Interest - Compound Interest Interest rate is...

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Compound Interest Interest rate is constant, but the dollar amount of interest increases over time. Ex: You invest money in a savings account, and the amount in your account builds up over time. Interest is paid on principal and any accumulated interest. Compound interest formula: FV = PV × (1 + r) t Ex. 5: Compound Interest You invest $100 in a savings account earning 10% in compound interest. How much money is in your account after 1 year? 2 years? 5 years? 10 years? FV 1 = PV×(1+r) t = 100×(1+0.10) 1 = $110.00 FV 2 = PV×(1+r) t = 100×(1+0.10) 2 = $121.00 FV 5 = PV×(1+r) t = 100×(1+0.10) 5 = $161.05 FV 10 = PV×(1+r) t = 100×(1+0.10) 10 = $259.37 Simple vs. Compound Simple and compound interest of 10% on $100 over periods of 1 year, 10 years, and 100 years: For small investments, low interest rates, and short time periods, the returns on simple and compound interest are approximately the same. For large investments, high interest rates, or long time periods, compound interest pays more
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This note was uploaded on 01/31/2011 for the course FINANCE 301 taught by Professor Murray during the Spring '09 term at George Mason.

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Compound Interest - Compound Interest Interest rate is...

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