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Unformatted text preview: The calculation of compound interest is rather simple. To calculate the value of a loan, add one to the interest rate, raise it to the number of years for the loan, and multiply it by the loan amount. For example if you borrow $10,000 at 8% per year, in one year you would owe $10,000 * (1.08 ^ 1) = $800 in interest. To calculate the amount of interest, simply subtract the original loan amount from the total due. In this example, the interest due would be $10,800 - $10,000 = $800. Reasons for Paying Interest Why do people pay interest? Lenders demand that borrowers pay interest for several important reasons. First, when people lend money, they can no longer use this money to fund their own purchases. The payment of interest makes up for this inconvenience. Second, a borrower may default on the loan. In this case, the borrower fails to pay back Second, a borrower may default on the loan....
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This note was uploaded on 12/13/2011 for the course ECO 1310 taught by Professor Staff during the Fall '10 term at Texas State.
- Fall '10