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compound interest


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The interest on a loan that itself earns interest in later periods, i.e. the interest due each period is added to the amount outstanding. Thus, at an interest rate of 100r percent per period, after 1 period an original loan of A amounts to A(1 + r); after 2 periods to A(1 + r)2; and after N periods to A(1 + r)N. These successive values form a geometric progression with common ratio (1 + r). With continuously compounded interest the amount of loan is an exponential function of time, Aert.

Subjects: Economics.


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