Money has a time value because it can earn more money over time. A number of terms involving the time value of money were introduced in this chapter:Interest is the cost of money. More specifically, it is a cost to the borrower and an earning to the lender above and beyond the initial sum borrowed or loaned.Interest rate is a percentage periodically applied to a sum of money to determine the amount of interest to be added to that sum.Simple interest is the practice of charging an interest rate only to an initial sum.Compound interest is the practice of charging an interest rate to an initial sum and to any previously accumulated interest that has not been withdrawn from the initial sum. Compound interest is by far the most commonly used system in the real world.
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