Simple & Compound Interest

Simple & Compound Interest - F at end of year 1 is...

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Simple Interest is a historical concept whereby interest is calculated only on the original principal borrowed. Compound Interest , in widespread use today, bases the interest calculation on the original principal borrowed plus any accrued interest from prior periods.
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Simple Interest Interest earned on original principal only I = i * P * N F = P + I F = P + (i * P * N) or F = P(1 + iN) Example: $100 @ 10% per year for 2 years F = $100(1 + 10% * 2) = $120 $100 @ 10% per year for 20 years F = $100(1 + 10% * 20) = $300
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Compound Interest Example: $100 @ 10% per year compounded annually for 2 years F @ end Year 1 = P (1 + i) = $100 * (1 + 10%) = $110
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Unformatted text preview: F at end of year 1 is P at beginning of Year 2 F @ end Year 2 = P (1 + i) * (1 + i) = $110 (1 + 10%) or Combining Terms: F = P (1 + i) 2 F @ end Year 2 = $100 (1 + 10%) 2 = $121.00 What is the balance in 20 years? Yr 1 Yr 2 Yr 20 F @ end of year 20 = $100(1+10%)(1+10%)(1+10%) F @ end of Year 20 = $100 (1 + 10%) 20 = $672.75 Compound Interest Contd For any number of Periods N: F = P (1 + i) N [(1 + i) N ] is known as the Compound Amount Factor Solving for P we obtain: P = F (1 + i)-N [(1 + i)-N ] is known as the Discount Factor or Present Worth Factor...
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This note was uploaded on 02/16/2012 for the course ENGR 265 taught by Professor Arnold during the Spring '09 term at University of Arizona- Tucson.

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Simple & Compound Interest - F at end of year 1 is...

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