Introduction to Compound Interest | Summary and Q&A

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March 19, 2010
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Khan Academy
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Introduction to Compound Interest

TL;DR

This video discusses the concept of compound interest and introduces the rule of 72 as an approximate method to calculate the time it takes to double your money.

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Questions & Answers

Q: What is compound interest?

Compound interest is when the interest earned is added to the principal, and then interest is earned on the new total amount.

Q: How does compound interest differ from simple interest?

Simple interest only calculates interest on the principal, while compound interest takes into account interest earned from previous years as well.

Q: Why is calculating compound interest difficult?

Calculating compound interest involves using exponents and can become increasingly complex with varying interest rates or longer time periods.

Q: What is the rule of 72?

The rule of 72 is an approximate method to determine how long it takes for an investment to double by dividing 72 by the interest rate.

Summary & Key Takeaways

  • Compound interest is the interest earned on both the original deposit and the accumulated interest from previous years.

  • The formula to calculate the amount after a certain number of years is Principal x (1 + Interest Rate)^Number of Years.

  • Calculating compound interest can be complex and time-consuming, especially with varying interest rates.

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