This section is from the book "Elementary Banking", by John Franklin Ebersole. Also available from Amazon: Elementary Banking.

Interest is compensation paid for the use of money - money borrowed either directly or on an account due or for other obligations. Notes are either interest bearing or non-interest bearing, as the notes provide. Interest is either "simple" or "compound." "Simple" interest is a sum paid for the use of the principal only. But sometimes the interest for a, certain period is added to the principal and the interest for the next period is on this principal and interest added together; the interest on the total is "compound" interest. Suppose A loans B $1,000 on a promissory note due in two years, to draw interest at 6%. Under simple interest A would get $1,120 at the maturity of the note. But suppose the note contained a provision that interest should be compounded annually. Then at the end of the first year the interest ($60) would be added and the new principal for the second year would be $1,060, so that when the note became due A would get $1,123.60. Unless specifically stated otherwise, interest is simple. If interest is not paid when due, interest on the unpaid interest cannot generally be collected. Banks usually collect interest in advance on their discounts of commercial paper.

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