Suppose that an amount of money P is invested, attracting interest at i per cent annually. After one year, the amount becomes P(1 + i/100). So, adding on i per cent is equivalent to multiplying by 1 + i/100. When interest is compounded annually, all the previous year’s amount is used to calculate the interest due in the following year. So, after n years, the amount becomes
This is the formula for compound interest. This amount increases exponentially in contrast to the linear growth obtained with simple interest.
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