Posted by Eduardo (OR) on June 14, 1999 at 20:43:40:

Hi John–

Thought you might like this one. As you know, simple interest loans have interest computed entirely on the original principal. Compound interest is based on a principal that is increased each time interest is earned. So, compound interest results in the larger return–following the first time interest is earned. But not before! For example, a loan is set up at compound interest: $1,000 at 10% per annum compounded annually. But the loan is paid at the end of six months. What is the interest paid? $48.81 (use c status indicator with the HP-12C). The same loan at simple interest gives the result: $50.00. (I like to visualize compounding returns being along a curved line and simple interest computing being along a straight line. Where the lines cross is where compound and simple pay the same amount [at the end of one year in the example]. Before they cross [before the first time interest is earned], the line for compounding dips below the straight line for simple and here, then, simple interest always pays more.) Just a little interesting tidbit. Enjoy your posts. --Eduardo