The Difference Between Simple Interest and Compound Interest

We will be going into the difference between simple interest and compound interest. The results can be astounding when comparing the two results of any kind of example when comparing the two. To understand your finances and how your money works this will be a very integral part of knowledge.

The first and most important difference between these two types of interest is that in compound interest you begin to earn interest on the interest that you earned in the prior period. In simple interest this is not the case. In simple interest, which is used primarily in loans and short term periods, the principal is the only amount the interest is calculated from. In other words, you are going to accumulate a lot more interest when the interest is calculated by using compound interest.

When dealing with compound interest the interest is calculated on a daily, monthly, quarterly, semi-annually, or annually. The formula that is used to calculate this interest on a bond for example would be Interest= Principal x Rate x Time (number of periods). By looking at this formula you can tell how the number of periods is going to be much different from how it looks in the simple interest formula.

When using simple interest the interest is calculated on a daily or monthly basis. The standard amount of days used in a calendar year is 360 rather than 365. The formula to calculate simple interest on a loan for example is also Interest= Principal x Rate x Time (a fraction such as 6/12).

As you can see by comparing the two formulas the difference between the “Time” portion of the formula is significantly different. By looking at this anyone can easily see why compound interest accumulates at such a higher rate than simple interest. Anyone who has any type of investments can easily see that they would much more prefer compound interest and people with loans would much more prefer simple interest.

...Question #1 |
| | Jamie wants to earn $500 in interest so she’ll have enough to buy a used car. She puts $2000 into an account that earns interest. How long will she need to leave her money in the account to earn $500 in interest? |
| | |
Question #2 |
| | A local bank is advertising that you can double your money in eight years if you invest with them. Suppose you have $1000 to invest. What interest rate is the bank...

...principal is P50,000 and the interest rate is 12% compounded quarterly, what is the compound interest at the end of 5 years?
Find the compound amount if P17,500 is invested at 9.2% compounded semi-annually for 3.5 years.
Determine the present value of P150,000 due in 6 years if the interest rate is 5.5% compounded annually.
If P135,650 is the maturity value of a sum invested at 13.2% compounded semi-annually or 9 years and 6 months, find the...

...000 to grow to $30,000 at 8%p.a. simpleinterest? (in years correct to two decimal places)
Q2: Calculate the present value of $10,000 due to be paid 3 years from now. The interest rate to use in the calculation is
i4 40%
Q3: Calculate the present value of $10,000 due to be paid 3 years from now. The interest rate to use in the calculation is
i2 40% ...

...COMPOUND INTEREST
Making or Spending Money
SIMPLEINTEREST FORMULA
If a principal of P dollars is borrowed for a
period of t years at a per annum interest rate
r, expressed as a decimal, then interest I
charged is
I Pr t
This interest is not used very often. Interest is
usually compounded which means interest
is charged or given on the interest and the...

...Math 50
Solving SimpleInterest Problems using Systems of Equations
The simpleinterest I earned after one year on a deposit of principal P in an account earning interest at
an annual rate r is given by
(Notice that this is the Basic Percent Equation with percent r, base P and amount I.)
The problems below involve investing money in two different accounts, each paying annual simple ...

...with a 2% interest rate, or in a five year certificate of deposit with and interest rate of 4.5%. Calculate how much interest you would earn with each option over five years time with continuous compounding.
I’m going to do this for my checking and savings account amount
Checking Account
A = Ce^RT My total money in the checking account is 2100 dollars Since the formula for the continuous compounding is A=Ce^RT where C is the initial deposit or...

...Continuously Compounded Interest
Mathematics: MATH650 section 02
Wendy Forbes
April 27, 2010
We often hear people say that we should let our money work for us.
Using money or capital for income or profit is called an investment.
An accountant manages a company’s money. Then, managers or company investors review their reports to find out the financial status. The demand for accountants increases as more private companies are established. In addition, there are...

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