The interest is the percentage of an initial amount, or "principal," that is added to that principal over time. A loan will be repaid within the agreed-upon time frame, in the case of one. A savings or investment account will be repaid over the investment's lifetime or while the account has money in it. The simple and compound methods of calculating interest are compared in this article.
What is Simple interest: An interest rate that is added to the principal on a regular basis is known as simple interest. The amount of interest added to a loan over time can be calculated by multiplying the interest amount by the time period, for example: i = p x r x t In that formula, t is the duration of the loan. What is compound interest? Interest compounded on the principal includes all accrued interest previously. The following formula can be used to calculate the amount of compound interest you would accrue every year: i = p x (1 + r)t - p There are 12 accrual or compounding periods in a year, so p represents the principal, r represents the interest rate and t represents the number of interest accrual periods. Adapt the following formula if you have more than one compounding period in a year: i = p x (1 + r/t)t x y - p In this version of the formula, y is the number of years. Simple vs. compound interest: differences There are some significant differences between simple and compound interest:
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AuthorAman Khanna is an experienced financial advisor who is well known for his ability to foretell the market trends as well as for his financial astuteness. He has an MBA in finance from Toronto University as well as years of experience delivering seminars on sound financial practices and debt management. |