Chapter P2, Problem 1RQ

To determine

The difference between simple and compound interest.

Explanation of Solution

The following are the difference between simple and compound interest:

Particulars	Simple Interest	Compound Interest
Definition	Simple Interest refers to the amount which would be paid back by using the money over a particular fixed time limit or time period.	Compound Interest refers to the interest rate which is charged by the creditor when the principal amount of credit exceeds the time limit or due date for the payment.
Basis	It is based on the principal amount.	This interest is based on the principal amount as well as the interest rate in a time period.
Principal and Return Amount	The principal amount in this type of interest remains constant and the return amount is less.	The principal amount would change from time to time during the time period of borrowing and the return amount is high.
Formula	This interest is calculated by the following formula: Simple interest $\text{=}\frac{\left(\text{P × R × T}\right)}{\text{100}}$	The compound interest is calculated by using the formula: Compound interest $\text{=P}{\left(\text{1+}\frac{\text{R}}{\text{n}}\right)}^{\text{t}}$

Economics Concept Introduction

Introduction: The amount which is charged by the creditor, lender, or any financial institution above or over the principal amount of the loan or credit is called the interest rate.