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When it comes to saving money and getting ahead in life, there’s no better tool than compound interest. This powerful financial concept can help you turn a small amount of savings into a fortune over time. In this blog post, we’ll discuss the difference between simple interest and compound interest, as well as how to calculate each one. We’ll also answer some common questions about compound interest so that you can start using this tool to your advantage!
What is simple interest?
Simple interest is a calculation of the interest on the initial investment or principal only. It doesn’t compound, which means that the interest from one period isn’t added to the principal for the next period.
What is compound interest?
Compound interest, on the other hand, is calculated on the initial investment or principal, as well as the accumulated interest of earlier periods. This means that the interest from one period is added to the principal for the calculation of
Difference between simple and compound interest
When it comes to interest, there are two main types: simple and compound. Now, the question comes what is the difference between simple interest and compound interest
Simple interest can be calculated only on the initial amount of money invested or taken. Compound interest is calculated on the initial amount and also accumulated on previously earned interest.
Relation between simple interest and compound interest
The relation between the simple interest and the compound interest is that the compound interest includes both the initial investment or principal, as well as the accumulated simple interest. The difference between simple and compound interest is that simple interest can be calculated only on the principle, while compound interest includes the principle as well as accumulated interest.
Compound interest and simple interest formula
Below is the compound interest and simple interest formula. First, we have discussed the formula for simple interest so that it becomes easier for you to understand
Simple Interest Formula
In simple interest, only the original sum of money (P) and the interest rate (r) are used in the equation. This results in a single payment at the end of the term.
I = P * r * t
For example: if you have $100 dollars and the interest rate is five per cent, then at the end of one year you would owe $105.
Compound Interest Formula
In compound interest, the initial sum of money (P) and the interest rate (r) are still used in the equation. However, the difference is that compound interest can be compounded at different rates for each period of time (t).
A = P * ( (r + n) / (r – n) ) ^ t
A = 4000$ * ((0.05 + 0.00) / (0.05 – 0.00)) ^ 15
A = 4000$ * ((0.05)/(0.05)) ^ 15
A = 4000$ * (0.001) ^ 15
A = $410.71
Solved questions on simple interest and compound interest questions
Here are some simple interest and compound interest questions, so that you can understand it better.
Question: Find a simple interest on Rs 10,000 at a rate of 12% per annum for one year.
Solution:
The formula for simple interest is I = PTR/100.
I = 10000×12/100×12 months= 1200
The simple interest is Rs 1200.
Question: Find the difference between compound interest and simple interest on Rs. 10000 for two years at a rate of 12% per annum.
Solution:
The compound interest formula is A = P( (P+I)n-P)/n.
A = 10000×(12+(12/100)²)-10000/200
A = Rs. 1260.64
The difference between compound interest and simple interest is Rs 460.64.
Question: Find the compound interest on Rs. 10000 for two years at a rate of 12% per annum.
Solution:
The compound interest formula is A = P( (P+I)n-P)/n.
A = 10000×((12+(12/100))²)-10000/200
A = Rs. 1260.64
The difference between compound interest and simple interest is Rs 460.64
Solve this question: Find the difference between simple interest and compound interest on Rs. 50000 for two years at a rate of 15% per annum.
Conclusion
Have you ever wondered how your savings account balance grows? The answer lies in two types of interest rates, simple and compound. It also lies in the difference between simple interest and compound interest. Simple interest is a rate that accumulates overtime on the principal until it reaches zero after an infinite amount of time. Compound interest means that not only does the original sum earn additional money, but so do all previous earnings from the same point forward. If you would like to learn more about these concepts or have any questions for our finance experts, please contact us today!
