Q2.2 Compound Interest: More typical interest computation applied in business situations Computes interest on: and Illustration 3: Vasquez Company deposits $10,000 in the Last National Bank, where it will earn simple interest of Simple vs. 9% per year. It deposits another $10,000 in the First State Bank, where it will earn compound Compound interest of 9% per year compounded annually. In both cases, Vasquez will not withdraw any interest until 3 years from the date of deposit. Year 1 Year 2 Year 3 Last National Bank Interest YE Balance First State Bank Interest YE Balance

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Effective Interest Rate

The term interest rate can be defined as the amount that is charged by the lender as a percentage on the principal amount. Interest rate which is charged annually is known as annual percentage rate.