Given a choice between the 2 different types of interest, which will you choose? This is taught under Elementary Mathematics (E-Math)
Before you make the smart choice, let’s examine the differences between these 2 different types of interest through an example.
CASE OF SIMPLE INTEREST
alwaysLovely deposited $1000 into Bank A for 2 years which pays a simple interest of 10% p.a.( per annum –> per year). How much will she get at the end of 2 years?
1 year –>10% , 2 years –> 20%
Total interest earned for 2 years = 1000 * 20% = $200
Total amount = $1000 + $200 = $1200
CASE OF COMPOUND INTEREST
alwaysLovely deposited $1000 into Bank B for 2 years which pays a compound interest of 10% p.a. How much will she get at the end of 2 years?
Interest earned in Year 1 = 1000 * 10% = $100
Principal Amount for Year 2 = $1000 + $100 = $1100
Interest earned in Year 2 = 1100 * 10% = $110 /*Interest is calculated based on the new principal amount*/
Total amount received for 2 years = $1000 + $100 + $110 = $1210
So which is better, Bank A or Bank B ?
Check out the next post on Formulae Usage on Simple And Compound Interest which will reduce your time to reach your correct answer.
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