INTEREST AND INVESTMENT

Interest and Investment

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Interest: The cost of borrowing money or the return on investment.

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Simple Interest: Interest calculated only on the principal amount.

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Compound Interest: Interest is earned on both the principal and previously earned

interest.

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Compounding Interest: The process of applying compound interest over multiple

periods.

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Ordinary Interest: Interest calculated based on a 360-day year.

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Nominal Rate of Interest: Stated interest rate, not accounting for compounding.

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Equivalent Nominal Rate: Converts interest rate from one compounding frequency to

another but keeps the nominal annual rate consistent.

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Effective Rate of Interest: Actual interest rate accounting for compounding.

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Effective Interest Rate for Continuous Compounding: Interest rate under the

assumption of continuous compounding.

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Continuous Compounding: Compounding that happens infinitely frequently in a given

period.

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Return of Investment (ROI): Percentage of gain or loss relative to the investment.

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Rate of Return: Profit or loss on an investment as a percentage of its cost.

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Investment Cost: The initial cost of purchasing an asset or starting a project.

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Working Capital: The short-term funds required to maintain daily operations.