Compound interest is a concept that is calculated on the principal and interest unlike simple interest that is calculated on principal value. To understand the difference between simple interest and compound interest.
You have $5,000 to invest in a bank that has two investment plans. The first option is that you will invest $5,000 for five years at 10% and you can withdraw interest every year. This is an example of simple interest.
Simple interest = $5,000 x 10% x 5 years = $2,500
The second option is that you will deposit $5,000 for five years and you will earn 10% interest compounded annually. In this, you will not be able to withdraw the interest because that will be reinvested.
Compound interest = $5,000 x [(1 + 10%) 5 – 1] = $3,052.55
The following are a number of values taken from compound interest tables
What is compound interest? Compare compound interest to discounting.
Listed below are several terms and phrases associated with concepts discussed in
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