simple interest

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The system by which repayment of a loan after n periods requires payment of a sum equal to the principal plus n times the interest payable for a single period. If the principal is P and the interest rate per period is r, at the end of n periods payment of P(1 + nr) is required. As n increases, the proportional rate of return to the lender goes down, as the proportional return for the (n + 1)th period is rP/[(1 + nr)P], which is a decreasing function of n. Simple interest is very rarely used, except for loans of very short duration.

Subjects: Economics — Mathematics.

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