Question

difference between simple and compound intrest with example

Answer 1

Question-difference between simple and compound intrest with example?

Answer- when a person borrows money from a bank or any financial institution the extra amount charged by the institution is termed as Interest.

Interest is of 2 types simple interest and Compound interest.

Simple interest- It is the interest charged on the total principal amount of the loan.it is calculated by multiplying the interest rate by the principal amount and by the number of day of loan.

Example-if you deposit $1000 in the bank and get return of 5% per year for 3 years.

Now calculating simple interest at the end of 3rd year that you will get-

Principal (P)=1000

Rate (R)= 5%

Time (T)= 3 yrs.

Simple interest=PxRxT/100

=1000x5x3/100

Simple interest = 150

Compound Interest- compound interest is the addition of interest on the principal amount then charging the new interest or can be said as Interest on interest

Example-(Taking the same example as above)

Compound interest=Compound Interest Calculation = P [(1 + R)^n – 1]

=100x{(1+5)^3-1}

=157.625