Community Forex Questions
How is compound interest different from simple interest?
Compound interest and simple interest are two methods of calculating interest, which is the amount of money earned on an investment or paid on a loan. The main difference between the two is the way in which the interest is calculated.
Simple interest is calculated only on the initial principal amount of an investment or loan. For example, if you invest $1,000 at a 5% interest rate for one year, you will earn $50 in interest at the end of the year. This interest is based solely on the initial $1,000 investment.
Compound interest, on the other hand, takes into account the interest earned on the initial investment as well as any interest earned on that interest over time. In other words, the interest is added to the principal amount, and the interest is then calculated based on the new total. This results in higher returns over time than simple interest.
For example, if you invest $1,000 at a 5% interest rate compounded annually for one year, you will earn $50 in interest at the end of the year. However, if you reinvest that interest and continue to compound the interest annually, you will earn even more in subsequent years.
Overall, compound interest is a more powerful tool for generating returns over the long-term, while simple interest is a simpler and more straightforward way of calculating interest on shorter-term investments or loans.
Simple interest is calculated only on the initial principal amount of an investment or loan. For example, if you invest $1,000 at a 5% interest rate for one year, you will earn $50 in interest at the end of the year. This interest is based solely on the initial $1,000 investment.
Compound interest, on the other hand, takes into account the interest earned on the initial investment as well as any interest earned on that interest over time. In other words, the interest is added to the principal amount, and the interest is then calculated based on the new total. This results in higher returns over time than simple interest.
For example, if you invest $1,000 at a 5% interest rate compounded annually for one year, you will earn $50 in interest at the end of the year. However, if you reinvest that interest and continue to compound the interest annually, you will earn even more in subsequent years.
Overall, compound interest is a more powerful tool for generating returns over the long-term, while simple interest is a simpler and more straightforward way of calculating interest on shorter-term investments or loans.
Apr 25, 2023 11:55