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LECTURE 27
Compound Interest
An investment
is the use of money or capital for income or profit. We
can divide investments into two classes: fixed investments
and variable
investments
. In a fixed investment the amount invested will be paid back
along with interest, computed at a fixed rate. Savings accounts are an
example of a fixed investment. In a variable investment, neither the
return of the principal nor the interest is guaranteed. Stocks and mutual
funds are examples of variable investments.
Recall that simple interest is calculated once for the period of the loan
using the formula i = Prt. Banks compute interest periodically (daily or
quarterly for example) and the interest is added to the principal, creating
a new principal from which the next interest amount is calculated. In
effect the bank is computing interest on interest, and this method is
known as compound interest
.
Ex.
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This note was uploaded on 09/22/2011 for the course MAC 2311 taught by Professor Evinson during the Spring '08 term at University of Central Florida.
 Spring '08
 EVINSON
 Math, Calculus

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