Discussion The difference between compounding and simple interest? Are you surprised how much money you can...

Discussion

The difference between compounding and simple interest? Are you surprised how much money you can quickly owe with a compound interest loan agreement?

Expert Solution

1)

Simple interest is calculated based on the principle amount of the loan or investment and compound interest is calculated based on the principle and interest accumulated in every period.

Simple ineterst is easier to compute since the computation is based only on the principle amount.

An investment grows at a faster rate using compund interest than simple interest. This happens because interest is also calculated on the interest earned ever period.

Simple Interest = Principal amount (P) x Interest Rate (I) x Term of loan or deposit (N) in years.

Compound Interest = Total amount of Principal and Interest in future less Principal amount at present

Principle remians constant when charging simple interest. Principle goes on changing during the entire borrowing period while using compound interest.

2)

I am not surprised as the more frequently your debt compounds, the faster you will accumulate interest. It means that the debtor will owe more interest while the debt is outstanding.

jeff jeffy answered 2 years ago

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