Chapter 6.6, Problem 37HP

To determine

To find: Compare simple interest and Compound interest.

Explanation of Solution

Formula for Simple interest:

  $I=prt$

Where

  $I=$ Simple interest.

  $p=$ Principal amount

  $t=$ time in years.

  $r=$ Annual interest rate.

Formula for Compound interest:

  $A=p{\left(1+\frac{r}{n}\right)}^{nt}$

Where

  $A=$ Total amount

  $p=$ Principal amount

  $t=$ time in years.

  $r=$ Annual interest rate.

  $n=1$ for compounded annually.

Simple interest is calculated on the principal amount or Original amount.

It means the amount of money earned will be same every year because it is always applied to initial amount or Original amount.

Where as

Compound interest is calculated on the principal amount and also on the accumulated interest of previous periods, and can be regarded as “interest on interest”.

In compound interest the amount of money earned will increase every year because it is applied to the new total after the interest is added each year.