Simple and compound interest

[Huyen Le]

Hi,

I have this question about interest and I think simple interest = compound interest if it is compounded annually. But I am not so sure so anyone can confirm this? Tks

[niketdoshi123]

Hi,

I have this question about interest and I think simple interest = compound interest if it is compounded annually. But I am not so sure so anyone can confirm this? Tks

Yes Simple interest = compound interest,when the compound interest is compounded annually, if and only if the time by which the amount is to paid back is 1 year (# of year for which the interest is calculated is 1).

[eagleeye]

Hi,

I have this question about interest and I think simple interest = compound interest if it is compounded annually. But I am not so sure so anyone can confirm this? Tks

Hi Huyen:
Unfortunately, the simple interest does NOT always equal compound interest if interest is compounded annually.
However, there is a useful concept.

Simple interest equals compound interest only under one condition.
If the period of compounding is one, simple interest = compound interest.

For example:

If interest is compounded monthly, simple interest after one month = compound interest after one month.
If interest is compounded annually, simple interest after one year = compound interest after one year etc.
After the first period, compound interest is always larger than the corresponding simple interest.

Let me know if this helps

[Huyen Le]

Thank you, How about this example:
A deposit 100$ in account at 2% interest, compounded annually. After 3 years, what is the balance in the account. For this one to calculate interest, I used compound interest formula but the answer in the book is to use successive percent which i find confusing when to use which.

[eagleeye]

Thank you, How about this example:
A deposit 100$ in account at 2% interest, compounded annually. After 3 years, what is the balance in the account. For this one to calculate interest, I used compound interest formula but the answer in the book is to use successive percent which i find confusing when to use which.

Successive percent is the same as compounding; Successive percent way is just calculating compound interest in more than one step. You can almost always go with compounding formula.
I will solve it using compounding. You will be able to see how compounding is same as successive percentage way

A = P*(1+r%)^(time)
So,
A = 100*(1+0.02)^3
= 100*(1.02)^3
= 100*1.02*1.02*1.02
= (100*1.02)*1.02*1.02
= (102)*1.02*1.02
= (102*1.02)*1.02
= (104.04)*1.02
= (104.04*1.02)
= 106.12

Let me know if this helps

[Huyen Le]

Thank you, How about this example:
A deposit 100$ in account at 2% interest, compounded annually. After 3 years, what is the balance in the account. For this one to calculate interest, I used compound interest formula but the answer in the book is to use successive percent which i find confusing when to use which.

Successive percent is the same as compounding; Successive percent way is just calculating compound interest in more than one step. You can almost always go with compounding formula.
I will solve it using compounding. You will be able to see how compounding is same as successive percentage way
Let me know if this helps

Its true successive percent is the same as compounding Thanks alot