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Simple vs. Compound Interest
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The following two examples of methods of computing interest on a principal sum illustrate the differences between simple interest and compound interest. Both examples use a $100 principal and 7% interest. Simple Interest The interest rate is applied only to the original principal amount in computing the amount of interest.
Compound Interest The interest rate is applied to the original principle and any accumulated interest.
All other things being equal, compound interest has a larger effect as the time period increases and as the interest rate increases. |
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