In the last video, I hopefully showed you that if I borrowed P dollars, and I borrow it for a year, and you were to charge me an interest rate of r, or you could say 10r , then at the end and we were to compound continuously.

At the end of 10 years, I owe 500.

So now, in this situation. we are compounding the interest.

So t is equal to three years.

A lot of people, you know, when you hear 10 interest rate or even a 25 interest rate, that no one really makes a big deal about it.

166 effective interest rate.

And whatever the down payment percentage is, it'll calculate it.

So these are kind of the important numbers in the home buying scenario.

So if you're getting 5 a year, that's going to be equal to let's do it on the calculator.

We borrowed money at high interest.

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And then of course you get the interest from the money that you put in the bank.

Bank lending is rising because of lower interest rates.

So we'll say Hey this is your cash for tonight, if you need it for the next night, we'll talk again.

Compounded for 64 years.

Periods per year

Periods

That equals my final payment or how much I owe once all the interest and the principal has compounded.

We get r is equal to 0.23, or 23 .

That equaled 2.613.

And once, again let's say that risk free I could put money

We all have heard of it.

We borrowed money at high interest.

100 interest.

Here's Fredrik, let's get out of here.

(Applause)

I'm just multiplying this times itself.

I also want 100 of that.

That's not bright enough.

The price of money will go down, that's what the federal funds rate is, it's the target rate, so I'll say Fed Funds Rate, it's the target rate that the Fed sets for the overnight borrowing of reserves between banks, that's the Federal Funds Rate, and it will go down and that's how the Fed tries to set the Federal Funds Rate.

But if it was risk free, you could discount it like that.

This is actually the power of compounding interest.

See, I got tired of just looking, just trusting to luck, so I saved up enough money to buy some information.

What if I sell a socks website, and socks have gotten even more popular.

He calculated the expenses.

OK, so let's say I borrow 1,000.

And I'm going to have to pay rent to borrow that share.

My older brother borrowed money from a loan shark.

And this is a really good time to kind of let it all sink in.

That's 100 , right?

When we did return on asset, we looked at the operating profit, because this is what our company generated before we paid the bank or Uncle Sam or anything like that.

Income for tax filing, that declined by 3 .

The mortgage payment, we calculated that before, using our mathematical knowledge of geometric series.

And it doesn't matter over what

When I compounded it 10 for 10 years using compound interest, I owe 259.