Describe the methods of calculating interest?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Describe the methods of calculating interest?

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Step 1

In the finance industry, every decision revolves around the interest rate. This is a crucial decision because it has a large impact on the business.

Step 2

The methods of calculating interest are discussed as follows:

Simple interest method – In this method interest amount is calculated for the period and after that interest is paid out and again interest is computed on the principal for calculating the interest amount for the following period.

 

Compound interest method – In this method interest is calculated on the original amount and then the interest earned is added to the original amount and interest is calculated on that amount for the future period. This is the most genuine method because it will count interest on interest.

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