Simple and Compound Interest Calculations Simple interest is the interest calculated on the principal amount (original amount) alone. It is calculated by...
Simple interest is the interest calculated on the principal amount (original amount) alone. It is calculated by multiplying the principal amount by the interest rate.
Compound interest is the interest calculated on the principal amount plus the accumulated interest from previous periods. This means that the interest earned in each period is added to the principal amount and then earns interest in subsequent periods.
Difference between Simple and Compound Interest:
| Feature | Simple Interest | Compound Interest |
|---|---|---|
| Calculation | Principal amount × Interest rate | Principal amount × (1 + Interest rate) ^ Period duration |
| Time period | Single period only | Multiple periods |
| Result | Single amount | Final amount at the end of the period |
Simple Interest Formula:
I = P × r × t
Where:
I = Interest
P = Principal amount
r = Interest rate
t = Time period
Compound Interest Formula:
A = P × (1 + r/n)^(nt)
Where:
A = Final amount
P = Principal amount
r = Interest rate
n = Number of times per year the interest is compounded
t = Time period
Examples:
Simple Interest: If you deposit 6.
Compound Interest: If you invest 220.
Applications of Simple and Compound Interest:
Simple interest is often used for basic calculations, such as calculating the total cost of an item after it has been purchased or the interest earned on a savings account. Compound interest is used in various financial scenarios, such as calculating the future value of an investment or determining the interest earned on a loan