Bank A pays 10% compounded annually, and bank B pays 10% simple interest. If you want to triple your investment, compared to save the money in bank A, how many more years will you take if you save the money in bank B? 5.8 7.8 8.5
Bank A pays 10% compounded annually, and bank B pays 10% simple interest. If you want to triple your investment, compared to save the money in bank A, how many more years will you take if you save the money in bank B?
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5.8 |
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7.8 |
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8.5 |
Simple Interest (SI) is calculated based on the initial principal amount (P), the annual interest rate (r), and the time period in years (t).
SI = P * r * t
Where:
- SI = Simple Interest
- P = Principal amount (initial deposit or loan amount)
- r = Annual interest rate (in decimal form, not percentage)
- t = Time period in years
The key feature of simple interest is that it remains constant throughout the entire time period.
- Compound Interest:
Compound Interest (CI) takes into account not only the initial principal amount but also the interest that accumulates on that principal, which is reinvested or added back into the principal at regular intervals (compounding frequency).
The formula for compound interest is more complex and is as follows:
A = P * (1 + (r/n))^(n*t)
Where:
- A = Future amount (including principal and interest)
- P = Principal amount (initial deposit or loan amount)
- r = Annual interest rate (in decimal form)
- n = Number of times that interest is compounded per year
- t = Time period in years
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