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rusak2 [61]
3 years ago
5

Does compound interest have more of an impact for short-term investments or long-term investments? Why?

Business
1 answer:
vaieri [72.5K]3 years ago
5 0

Answer:

Compound interest have more of an impact for <em>long-term</em> investments

Explanation:

Interest earn on the principal for one period (P) is the same for compound and non-compound interest

The <u>non-compound interest</u> of period n is is the sum of P for all n periods: P*n

<u>Compound interest</u> is the result of reinvesting interest.

The compound interest of period n (I_{n}) = interest earned on the principal (P) + interest on <em>previously accumulated interest of n-1 periods</em> (I_{n-1}), where...

...<em>previously accumulated interest of n-1 periods</em> (I_{n-1})= interest earned on the principal (P) + interest on <em>previously accumulated interest of n-2 periods</em> (I_{n-2})

... and so on backward to the interest of period 1 = interest earned on the principal (P) = non-compound interest of period 1

It can be seen that the less (more) time pass, the less (more) the gap between compound interest and non - compound interest

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