When Interest is Compounded Annually

This study refers to the compound interest, by which the users can get more return value. Compound interest is the total amount of interest on the loan or deposit amount which is calculated based on both the initial principal amount and the interest from the previous years. This assignment is going to focus on both the strategy of simple interest and compound interest and also prove which one is the best out of these two methods. Moreover, compound interest has various advantages through one can increase the amount of their investment. 

Simple & Compound Interest

Simple interest is calculated on the particular amount of loan or the amount of contribution on the savings account. As with the rules of compound interest, simple interest is not a complex method. In the case of the strategy of simple interest, one individual or the account holder can get the interest based on their principal amount and even this method says that the borrower will not have to pay any interest. The standard formula for calculating the simple interest is Principal*Interest Rate*Term of the Loan. 

When an individual takes any loan from anyone or the authorized bank, they normally follow the rules of simple interest. As per the rules of the simple interest method, the lenders normally apply the payments for the month at first. However, the remainder of the payment decreases the amount of the principal. The borrowers are compelled to pay the full interest and thus the method is not accurate for both the money lenders and the borrowers. 

However, there are several benefits of simple interest and those benefits are: Simple interest can easily set a time frame for a significant payment amount. The simple interest method helps to make larger payments rather than reducing the amount of principal more quickly and however, it helps to reduce the charge of the remaining interest. As per the method of simple interest, the borrowers do have not to pay any interest on the acquired interest. However, the borrowers can pay their loans as soon as possible. Besides these advantages, there are also some disadvantages of simple interest. If the money lenders increase the rate of interest, then the borrowers are compelled to give those increased rates of interest. Moreover, if the mentioned time to back the loan is more, then the borrowers have to pay a more significant amount. However, it seems that the method of simple interest is followed in the case of any short-term loans such as personal loans. 

Compound interest is added to the principal sum of such loan or deposit amount that’s why this method is known as interest on interest. Compound interest is the standard method of calculating the interest in finance and the economy. 

As per the standard formula of the compound interest, A is known as the final amount of principal. P is known as the sum of the original principal and R is let as the nominal rate of annual interest. N is let as the frequency of compounding and t is known as the applicable time for the interest. 

When Interest is Compounded Half-Yearly

The half-yearly formula of compound interest helps to calculate the value by dividing the whole rate by two and multiplying the time by two. Compound interest is calculated based on both principles and the rate of interest and the amount is compounded within regular intervals and the new principles are also calculated in this method. The rate of interest in compound interest methods varies based on the period. If the period for calculating the interest is on a half-yearly basis, then the rate of interest is calculated every six months intervals and however, the amount of money is compounded twice in a year. As per the standard formula of half-yearly compound interest, the time is doubled and the rate is divided by two. 

Conclusion

From doing the overall assignment based on simple and compound interest, it can be said that the simple interest method is good for any kind of personal loan. But it also has many disadvantages, through which the money borrowers can be compelled to give more rate of interest for more periods. Whereas in the case of compound interest method, there is always mentioned a proper rate of interest for a significant time interval and this method helps to get more interest for the money investors because, in this method, money is compounded easily at a faster rate.