Microblog Memes

Compound interest when charged by lenders

Today “compound interest” usually relates to reinvested dividends and amortized growth/appreciation of investments (e.g., stocks, bonds) simply because non-predatory loans are designed for payoff within some fixed term. So if the term “compound interest” applies, something unexpected is happening (e.g., default) and the loan will be bundled and sold at a discount to collections.

Not far enough back to make a difference I’d wager

I’ll take that wager! 5k daily, ignoring inflation and leap-years, compounding annually (not quarterly) at 10% annualized ROI, gives us the standard annuity formula

1.1 * 5000 * 365 (1.1^n^-1) / 0.1

where n is the number of years, which

… in 100 years becomes ~278 billion (e11)

… in 200 years becomes ~3.8 million billion (e15)

… in 300 years becomes ~53 billion billion (e19)

… in 400 years becomes ~721 thousand billion billion (e23)

… in 533 years becomes ~231 billion billion billion (e29)

If that sounds incredible to you, you’re not alone. It’s the result of a hyperbolic growth curve that starts slow but keeps accelerating indefinitely, and 533 years is a very long time in market terms, so you easily reach the silly-numbers range.

Edit: the numbers before were napkin computation. I edited this to use the standard annuity formula which should be more accurate. Point should be the same though. Exponential growth is crazy.