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Simple and compound interest

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by niketdoshi123 » Thu Jul 26, 2012 7:17 pm
Huyen Le wrote: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).
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by eagleeye » Thu Jul 26, 2012 7:19 pm
Huyen Le wrote: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 :)
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by Huyen Le » Thu Jul 26, 2012 7:36 pm
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. :(
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by eagleeye » Thu Jul 26, 2012 7:46 pm
Huyen Le wrote: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 :)
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by Huyen Le » Thu Jul 26, 2012 7:52 pm
eagleeye wrote:
Huyen Le wrote: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 :D Thanks alot :)
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