simple interest vs compound interest
Simple Interest Vs. Compound Interest
Simple and compound interests are closely related to banking system, and they are the most basic maths we learn during our school classes. This article highlights the topic of simple interest vs. compound interest.
To understand this more clearly, let's see an example.
Example: Meredith borrows an amount of USD 1,000 from a bank and the bank charges a rate of 6%, compounded quarterly. Calculate the balance after 2 years.
Solution: Using the formula, we get,
P = USD 1000, R= 6% = (6/100) = 0.06, n = 4 (Remember, interest is compounded quarterly) and t = 2 years.
A = 1000(1 + 0.06/4)(4)(2)
A= USD 1126.492 or USD 1126 (approximately)
So, the amount Meredith has to pay to the bank is USD 1610 and the compound interest incurred is,
C.I. = Amount (A) - Principal (P)
C.I= $1126.492 - $1000 = $126 (approximately)
If we compare the two, we will find that for the same sum of money deposited at the same rate for a fixed number of time, the C.I. is always greater than the S.I., (except in the first year, where they are equal if the frequency of compounding is annual).