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Compound interest is calculated on the principal, as well as on any interest already earned. Use compound interest when the question explicitly uses the term "Compound".
Example:
John takes out a $10,000 loan at an annual interest of 12%, compounded semiannually. what will be the balance of the loan at the end of the year?
Notice the following:
1) Interest rate = 12% annual
2) Time - 1 year
3) Compound - semiannually. Interest is calculated after six months, then again at the end of the year.

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