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mgf1107lecture27 - MGF 1107 EXPLORATIONS IN MATHEMATICS...

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MGF 1107 – EXPLORATIONS IN MATHEMATICS 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 .
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