Discrete Compounding of Interest
Simple interest works in favor of the borrower. Think about Company A's $10k loan, but consider it from the lender's perspective. If it were only a 1-year loan, the interest due at the end of the first year would be this:
I = Pni = $10k* 1 * 0.11 = $1.1k
Company A actually owes $11.1k at the end of the first year. From the lender's perspective, the $1100 interest from the first year should be considered a loan itself during the second and third years. The interest due on the second year of the loan could also be considered a loan in the third year. This introduces the idea of compound interest. Literally, it's interest on interest.
The typical loan lasts more than one interest period, and the interest accrued ...
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