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Simple Interest Rates

Expert replies
by hgupta0 » Thu Dec 04, 2008 11:02 am
While i understand we can solve this problem using a simple interest rate computation, but why is the answer different when using I + P = P(1+r/n)^nt?

If $10,000 is invested at x percent simple annual interest for n years, which of the following represents the total amount of interest, in dollars, that will be earned by this investment in the n years

1) 10,000(x^n)
2) 10,000(x/100)^n
3) 10,000n(x/100)
4) 10,000(1+x/100)^n
5) 10,000(1+x/100)
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Source: — Problem Solving |

by Neo2000 » Thu Dec 04, 2008 11:09 am
Compound Interest is defined as Interest on the Interest. This means that lets say you have a principal 100 interest 10% and T = 2yrs

At the end of 1st yr, SI = 10 and CI = 10

At the end of 2nd yr SI = 10 and CI = 11

Now, why did CI increase? By its very definition, CI is calculated on the Prinicipal as well as on any interest. At the end of the first year, there was only the Principal sum to calculate interest for. However, when calculating interest the 2nd time, it would be calculated on P i.e.100 as well as on the interest i.e. 10

SI on the other hand, is only calculated on the Principal throughout
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by hgupta0 » Thu Dec 04, 2008 11:30 am
thanks champ.
Neo2000 wrote:Compound Interest is defined as Interest on the Interest. This means that lets say you have a principal 100 interest 10% and T = 2yrs

At the end of 1st yr, SI = 10 and CI = 10

At the end of 2nd yr SI = 10 and CI = 11

Now, why did CI increase? By its very definition, CI is calculated on the Prinicipal as well as on any interest. At the end of the first year, there was only the Principal sum to calculate interest for. However, when calculating interest the 2nd time, it would be calculated on P i.e.100 as well as on the interest i.e. 10

SI on the other hand, is only calculated on the Principal throughout
Join the discussion