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McGraw-Hill's Top 50 Skills For A Top Score: ASVAB Reading and Math by Dr. Janet Wall

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Skill 39 Calculating Simple and Compound Interest

When you borrow money from a bank or take out a mortgage or a car loan, you have to pay interest. When you put money in a savings account or an interest-bearing checking account, you earn interest on it for as long as the money stays in the account. There are two basic kinds of interest, simple and compound.

Simple Interest. Let’s say you borrow $10,000 to purchase a used car. The bank lends you that money (called the principal), but says that in order to have it, you must pay 5% interest on that principal sum every year.

You want to know how much interest you will have to pay on that original $10,000 in year 1 of your loan if you don’t pay back any part of the principal. This kind of interest, ...

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