Differentiate simple and compound interest.
Understand the Problem
The question asks for an explanation of the differences between simple and compound interest. This involves defining each type of interest, outlining how they are calculated, and highlighting the key distinctions in their effects on the principal amount over time.
Answer
Simple interest is calculated only on the principal. Compound interest includes accumulated interest.
Simple interest is calculated only on the principal amount. Compound interest is calculated on the principal amount and the accumulated interest from previous periods, leading to faster growth.
Answer for screen readers
Simple interest is calculated only on the principal amount. Compound interest is calculated on the principal amount and the accumulated interest from previous periods, leading to faster growth.
More Information
Compound interest results in exponential growth, while simple interest results in linear growth.
Tips
A common mistake is thinking simple interest is better because it's easier to calculate. However, compound interest yields a higher return over time.
Sources
- Simple vs. Compound Interest: Definition and Formulas - Investopedia - investopedia.com
- Simple vs. Compound Interest: What's the Difference? - investopedia.com
- Simple vs. Compound Interest: What's the Difference? | Indeed.com - indeed.com
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