In this video, I will explain the principles of simple and compounded interest

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00:55 – Principle of Simple Interest
01:50 – Principle of Compounded Interest
03:10 – Formulas for a 2-year compounding problem
04:46 – Expanding the compounding to more periods
05:26 – Excel Table with Compounded Interest
10:20 – Graph with the results of compounding interest
10:47 – Conclusions

In finance, interest and compounding interest play an important role. It is important to understand the principles of simple and compounded interest.

The principle of interest is already well known because w use it already for many years. When we put money in the bank, basically, the bank gives us a reward expressed as a percentage of the initial value. Let us consider an initial value of 100 Euro, and interest of 5%, this means that after one year, we will get 105 Euro.

But what happens when we keep the money in the bank and let it grow? Now, the initial value has increased up to 105 Euro and again the interest of 5% is now calculated on the new value and after 1 year, it becomes equal to 110,25 Euro.

The same would happen if we keep the money there longer and this is called compounded interest.

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