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Unformatted text preview: 0 = $11 in interest after the second year, making a total
of $100 + $11 = $121. This $121 is the future value of $100 in two years at 10 percent.
53 Another way of looking at it is that one-year from now, you are effectively investing
$110 at 10 percent for a year. This is a single-period problem, so you will end up with
$1.10 for every dollar invested, or $110 x1.1 = $121 total.
o This $121 has four parts.
o The first part is the first $100 original principal.
o The second part is the $10 in interest you earned in the first year.
o The third part is the other $10 you earn in the second year, for a total of $120.
o The fourth part is $1, which is interest you earned in the second year on the
interest, paid in the first year: ($10 x.10 = $1) The process of leaving the initial investment plus any accumulated interest in a bank
for more than one period is reinvesting the interest. This process is called
compounding. Compounding the interest means earning interest on interest so we
call the result compound interest. Wi...
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This note was uploaded on 01/30/2014 for the course ECONOMICS Banking an taught by Professor Jones during the Fall '10 term at Homestead Senior High School, Fort Wayne.
- Fall '10