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System Dynamics Demonstrations

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Effects of Compounding Interest
     Problems involving the time-value of money are dynamic. The simple act of entering into a contract to repay a loan can prove to be frightening when the extent of the repayments over a lengthy period is realised. This arises from the compounding of interest.
     Financial institutions will make their interest calculations daily, meaning that the effective interest rates are higher than the advertised per annum interest rates. A smart borrower can minimise the long-term accumulation of interest payable by choosing to make loan repayments fortnightly instead of monthly, for example.
     The construction of a relatively simple system dynamics model enables simulation of almost any loan repayment scenario, from the repayment of a housing mortgage through to determining the interest which accumulates month-by-month in a credit card account.
     A system dynamics simulator for calculating loan repayments is at Loan-Repayments-Simulator.sip. It is described at Loan-Repayments-Simulator.pdf.


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