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compound interest

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compound interest

by galit_d2d » Fri Apr 11, 2008 11:31 pm
hi, I am learning now from the princeton review book.
I can't understand what is simple interest, compound interest and the diffrence between them both.

there is an example in the book:

Ms.Lopes doposits $100 in an account that pays 20% interest, compounded semiannually. How much money will there be in the account at the end of one year?

1.$118
2.$120
3.$121
4.$122
5.$140

the answer is 3. but well ...I don't get why...
if someone can exlain me the subject and explain me the example
it will be a great help for me.
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by mleviko » Sat Apr 12, 2008 12:36 am
Hi Galit,
I'll try to explain with examples:

* A simple interest: you deposit $100 in a savings account that gives you 10% interest, every year you get 10% of that original $100. So after one year you'll have $110, after two years you'll have $120 etc. The interest is a percentage of the original sum invested.

* Compounded interest: The interest is calculated over the account you already have (including previous interest), so for example if you put $100 in a savings account that gives you 10% interest compounded anually, after one year you will have $110 and after two years $121 (your previous $110 + 10% of that, which is $11)


To solve the question you posted, you need to see that the account in question gives 20% interest, compounded semiannually. Semianually means that every half of one year (every 6 months), half of the interest will be put into the account. So this account gives %10 interest every 6 months, and you gain interest on that in the future.

If you put $100 in that account, you will earn 10% after 6 months, or $10 and you will have in total $110. After another 6 months you will earn another 10%, but this time over $110 (=$11), so you will then have $121.


I hope my explanation was clear enough.
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by galit_d2d » Sat Apr 12, 2008 12:51 am
thanx for the explantion, I understand now:)
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by mleviko » Sat Apr 12, 2008 12:57 am
bevakasha :)
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by richardwang6430 » Sat Apr 12, 2008 6:44 pm
$100 x 110% x 110%
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Re: compound interest

by shahdevine » Thu Aug 13, 2009 9:01 am
galit_d2d wrote:hi, I am learning now from the princeton review book.
I can't understand what is simple interest, compound interest and the diffrence between them both.

there is an example in the book:

Ms.Lopes doposits $100 in an account that pays 20% interest, compounded semiannually. How much money will there be in the account at the end of one year?

1.$118
2.$120
3.$121
4.$122
5.$140

the answer is 3. but well ...I don't get why...
if someone can exlain me the subject and explain me the example
it will be a great help for me.
100(1+.2/2)^2
100(1.21)
121

#3
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