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What is compound interest?
in Economics and Finance by Diamond (58,497 points) | 129 views

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Interest increases whatever it is applied to. But over time interest is added on interest. This is called compound interest (when interest is added to interest). The power of compound interest on a specific financial tool increases as time progresses. This gives way to exponential growth possibilities wherever compound interest has enough time to work its magic.
An investment of R1000 with an APR of \(5 \%\) increases with R50 of interest in the first year. The following year it's worth R1050 and increases with R52.50 (on an APR of 5\%). But let this run for 60 years and you'll see the exceptional power of compound interest. At the beginning of the 60th year, the investment is worth R17'789.70 and with the same 5\% APR, it increases with R889.49. In year one the investment increased with R50 but in year 60 it increased with R889.49 even though the APR remained the same because compound interest had time to accumulate more momentum.
by Diamond (58,497 points)

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