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Questions and Answers
When comparing simple and compound interest on an investment, which statement accurately describes a key difference?
When comparing simple and compound interest on an investment, which statement accurately describes a key difference?
- Simple interest results in varying interest amounts each year, while compound interest results in a consistent interest amount.
- Simple interest leads to the same interest value each year, while compound interest leads to a different interest value each year. (correct)
- Simple interest calculations require annual recalculations, while compound interest is a one-time calculation based on the initial investment.
- Simple interest is calculated on the principal plus accumulated interest, while compound interest only considers the principal.
Suppose R50,000 is invested at a simple interest rate of 10% per annum. What is the total amount, including the principal, after 4 years?
Suppose R50,000 is invested at a simple interest rate of 10% per annum. What is the total amount, including the principal, after 4 years?
- R90,000
- R80,000
- R60,000
- R70,000 (correct)
If an investment of R200,000 earns R31,060 in interest after one year with compound interest, what calculation is needed to find the interest earned in the second year?
If an investment of R200,000 earns R31,060 in interest after one year with compound interest, what calculation is needed to find the interest earned in the second year?
- Calculate the interest rate using the initial R200,000 value.
- Calculate the same fixed interest amount as the first year, since simple interest can be the same as compound for the first year.
- Calculate 15.53% of R200,000.
- Calculate the interest rate on the new value of R231,060. (correct)
When saving money, why is opting for a compound interest account generally more advantageous than a simple interest account?
When saving money, why is opting for a compound interest account generally more advantageous than a simple interest account?
Consider two investment options for 3 years: Option A offers simple interest at 10% per year, and Option B offers compound interest at 9% per year. Without calculation, which statement is most accurate?
Consider two investment options for 3 years: Option A offers simple interest at 10% per year, and Option B offers compound interest at 9% per year. Without calculation, which statement is most accurate?
What is the key step to comparing simple interest and compound interest returns on an investment?
What is the key step to comparing simple interest and compound interest returns on an investment?
Suppose you invest R5,000 in an account with a 7% annual simple interest rate. After two years, you move the total amount (principal + interest) into a new account earning 6% annual compound interest. What is the primary value you need to calculate to determine your earnings in the compound interest account?
Suppose you invest R5,000 in an account with a 7% annual simple interest rate. After two years, you move the total amount (principal + interest) into a new account earning 6% annual compound interest. What is the primary value you need to calculate to determine your earnings in the compound interest account?
If Bank A offers an investment with simple interest at a rate that results in R500 interest earned over one year, and Bank B offers a compound interest account that also results in R500 interest earned over the same year, what can you infer about the second year?
If Bank A offers an investment with simple interest at a rate that results in R500 interest earned over one year, and Bank B offers a compound interest account that also results in R500 interest earned over the same year, what can you infer about the second year?
Flashcards
Simple Interest
Simple Interest
Interest calculated only on the principal amount.
Compound Interest
Compound Interest
Interest calculated on the principal and accumulated interest.
Principal Amount
Principal Amount
The initial sum of money invested or borrowed.
Simple vs. Compound Interest
Simple vs. Compound Interest
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Earning interest on interest
Earning interest on interest
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Which interest is best for saving?
Which interest is best for saving?
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Calculate Interest Earned
Calculate Interest Earned
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Total Simple Interest
Total Simple Interest
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Study Notes
Simple vs. Compound Interest
- Simple interest calculates interest only on the principal amount, resulting in the same interest value each year.
- Compound interest calculates interest on the principal amount and the accumulated interest from previous periods, leading to a different interest value each year.
Simple Interest Explained
- Investing R115,000 at a 15.53% simple interest rate means the interest earned each year remains constant, based on the initial investment.
- If you invest R115,000 in January 2019, the interest earned for the first year is R17,859.50 (15.53% of R115,000).
- With simple interest, the interest earned each year is the same, so you only need to calculate it once.
- To find the total amount after three years, add the initial investment to the interest earned for one year, multiplied by three (the number of years).
- To calculate the total interest earned over three years, multiply the interest earned in one year by three, or subtract the initial value from the final value.
Compound Interest Explained
- With compound interest, the interest for each year is calculated based on the current value in the account, including previously earned interest.
- Each year, when calculating interest, the current account value is used.
- The interest earned in the second year is based on the new value, determined by multiplying the interest by the current amount in the account.
- Compound interest allows you to earn interest on interest.
- When saving money, compound interest is typically the preferred option for maximizing returns.
Example Comparison: Simple vs. Compound Interest
- Medicine invests R1800 for two years with two options: 11% simple interest (Bank A) or 8.5% compound interest (Bank B).
- To determine the better option, calculate the final amount for each bank after two years.
- With Bank A (simple interest), a fixed interest amount is earned each year, resulting in a total of R2196 after two years.
- With Bank B (compound interest), the interest earns are added to the previous interest, earning a total of R2119.01 after two years.
Calculating and Comparing Interest Earned
- The interest earned is derived by subtracting the starting amount from the ending amount.
- To calculate the interest earned from each bank, subtract the initial investment from the final amount.
- Bank A earns R396 in interest over two years, while Bank B earns R319.01.
- Subtracting the interest earned from Bank B from Bank A determines how much more interest Bank A earned compared to Bank B.
Key Takeaways
- Important for the formulas are: starting value, interest, and ending value.
- Find the interest with this formula: ending value - starting value.
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