Interest: Part 2
This video discusses how interest rates are applied. When you need to calculate the future value of an amount using a simple interest rate, you apply the interest rate only to the initial amount. On the contrary, when you calculate the future value of an amount using the compound interest rate, you apply the interest rate not only to the initial amount but also to amounts of interest earned. Compounding means you earn interest on interest. It is compounding that allows your savings to grow so much over time.
Source: Khan Academy, https://www.youtube.com/watch?v=t4zfiBw0hwM
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