Simple interest grows linearly, I=Prt, because you only earn on the original principal. Compound interest grows exponentially, A=P(1+nr)nt, because you earn interest on past interest. Continuous compounding uses A=Pert. For 2,000at42,240, and monthly compounding gives about $2,254.54.
To solve for time, you need logarithms. The Rule of 72 gives a fast estimate of doubling time, which is 72 divided by the percent rate.
For equal payments made at the end of each period, the future value of an annuity is FV=PMT[i(1+i)n−1], where i is the nonzero rate per period and n is the number of payments. If i=0, the future value is PMT⋅n. For a typical fixed-rate loan paid off with equal payments, the interest portion decreases and the principal portion increases over time.
On the data side, regression fits a model to points. For a linear relationship, r measures the strength and direction of the association, and r2 describes the proportion of variation in the output explained by the fitted line. A strong fit still doesn't prove that one variable causes the other.
Worked example. How long does 5,000taketodoubleat62 = (1.015)^{4t}.Takinglogsgives4t = \frac{\ln 2}{\ln 1.015} \approx 46.6.Sinceinterestiscreditedattheendofeachquarter,thebalancefirstreachesdoubleafter47quarters,or11.75years.TheRuleof72estimates72 \div 6 = 12$ years, which is close.
- Compound interest: Interest calculated on the principal plus all interest already earned, which produces exponential growth.
- Annuity: A series of equal payments made at regular intervals, like monthly savings deposits or loan payments.
- Correlation coefficient: A number rrr between -1 and 1 that measures how closely data follows a linear trend.
Which earns more in 10 years on 1,000at51000(1.05)^{10} \approx $1{,}628.89,comparedwith1,500 for simple interest.
| Type | Formula | Growth pattern |
|---|
| Simple interest | $A = P(1 + rt)$ | Linear |
| Compound interest | $A = P\left(1 + \frac{r}{n}\right)^{nt}$ | Exponential, in steps |
| Continuous compounding | $A = Pe^{rt}$ | Exponential and continuous in time |