Interest is not all the same
Posted by Dr. Yan Lyansky on 23rd Nov 2021
I gave a class a hypothetical question. Assume you take out a loan at 10% and get interest on a savings account at 10% from the same bank. Is this a break even proposition?
It turns out there are different interest formulas. Simple interest is given by: . While continuously compounded interest is given by: . Banks charge continuously compounded interest on loans, but they only pay simple interest. Therefore the 10% figures are not the same. Yield is better defined for laypeople. Keep an eye on that.