General Awareness on Simple and Compound Interest

When it comes to finance and money, simple interest and compound interest are two of the most important concepts to understand. Simple interest is pretty straightforward – you earn a set rate of interest on the initial amount you borrow or invest. Compound interest, on the other hand, is where things get more complicated. In short, compound interest means that your original investment earns interest, which in turn also earns interest. This can lead to exponential growth over time! In this blog post, we will discuss the difference between simple and compound interest and provide a simple formula for calculating compound interest.

What Is Simple And Compound Interest?

When you invest your money, you can get an amount at the end of the investment period. If the investment only has a simple return, then it will earn simple interest and if the principal earns a fixed percentage every year that accumulates on itself, then it will earn compound interest.

What Is The Difference Between Simple Interest And Compound Interest?

Here lies the difference between simple interest and compound interest:

1. Simple interest is a percentage of the principal earned each year while compound interest is the simple return plus any additional amount invested in that simple return. The simple return then earns more simple returns as time goes on, earning greater amounts every year until it reaches maturity.

2. Compound interest is the simple return plus any simple returns earned on that simple return. The simple return then earns more simple returns as time goes on, earning greater amounts every year until it reaches maturity.

Compound Interest And Simple Interest Formula

When it comes to understanding simple and compound interest, there is one key formula you need to know. We have mentioned the formula in the sections below. Moreover, we have explained each variable in the formula. Any student can understand the compound interest and simple interest formula with such simple explanations.

Here is the formula:

 A = P ( ( i + r )^n – 1).

Where:

A = the future value of your investment

P = the principal sum of money invested

i = the annual interest rate expressed as a decimal point

r= the amount of times you reinvest your interest earned each year

n = the number of years invested

The simple interest formula is simple. It is represented as P X I x T.

Where: p = principal, i = rate per annum and t = time in years.

The simple interest can be easily calculated if you know the three variables.

Simple Interest And Compound Interest Examples

Here is one of the simple interest and complex interest examples:

For example, if you deposit Rs.10000  in a bank account that offers simple interest at the rate of six per cent per annum, after one year you will have Rs. 10650 in your account. Whereas if the same amount is deposited in a bank account that offers compound interest at the rate of six per cent per annum, after one year you will have Rs. 10660.50 (Rs. 10000 *[(100+six percent)/100]^one year).

Uses of compound interest and simple interest examples

You can use simple interest and complex interest examples

– When you borrow money, the lender may charge compound interest, this means that the lender will calculate interest on both your original loan amount and on any accumulated interest.

– If you invest in a mutual fund or stocks, the returns that you earn are usually compounded annually