Chapter 4: Compound Interest

In the previous chapter, you saw that, in simple interest calculations, the amount of interest earned is the same for every time period – for example, the amount earned during the first 30-day period is the same as the amount earned in the second 30-day period.

In long-term loans, an increase in the amount of interest paid should follow an increase in the loan’s value.

In long-term loans, it is felt that, since the value of the loan increases with time (because of interest), the amount of interest should increase in later time periods. This increase is accomplished by calculating the interest as compound interest.