Carbon dating and logarithms
After n periods you have: This formula works as long as “r” and “n” refer to the same time period.It could be years, months, or days — though in most cases, we’re considering annual interest.When you have a growing thing, which creates more growing things, which creates more growing things… The most basic type is period-over-period return, which usually means “year over year”.
By that logic, do 100 and 200 earn the same amount, too? This issue didn’t seem to bother the ancient Egyptians, but did raise questions in the 1600s and led to Bernoulli’s discovery of e (sorry math fans, e wasn’t discovered via some hunch that a strange limit would have useful properties).
There’s much to say about this riddle — just keep this in mind as we dissect interest rates: APR is what the bank tells you, the APY is what you pay (the price after taxes, shipping and handling, if you get my drift).
Simple interest keeps the same trajectory: we earn “P*r” each year, no matter what ($50/year in this case).
That straight line perfectly predicts where we’ll end up.
No need to hit a mosquito with the calculus sledgehammer just yet.) Simple interest should make you squirm. We should use the bond payouts ($50/year) to buy more bonds.
Heck, we should use the golden eggs to fund research into cloning golden geese!
Let’s start on the ground floor: Simple interest pays a fixed amount over time.
A few examples: Simple interest is the most basic type of return.
And of course, banks advertise the rate that looks better. They’ll show the “low APR” you’re paying, to hide the higher APY. Well, of course they’d tout the “high APY” they’re paying to look generous.