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Why are compound interest bonds better than simple interest bonds?
Wiki User
∙ 14y ago
Imagine you have 2 different types of bonds:
Compound:
Let's say bond value is £100 and you get 4% quarterly interest on this investment.
Your bond value after one quarter will be:
Bond Value=£100
Interest Earned: 4%=£4
Total Value=£104
After 2nd quarter, the bond value would be:
Opening Value from quarter 1=£104
Interest Earned: 4%=£4.16
Total Value=££108.16
After 3rd quarter, the bond value would be:
Opening Value from quarter 1=£108.16
Interest Earned: 4%=£4.33
Total Value=££112.49
After 4th quarter(or after a year), the bond value would be:
Opening Value from quarter 1=£112.49
Interest Earned: 4%=£4.50
Total Value=££116.99
Simple
Bond Value=£100
Interest Earned=16%(because it's 4% per quarter and there are 4 quarters in a year)
=£16
Total Bond Value=£116
so bond value after a year is more under Compound than it is under Simple interest bond.
The reason is because simple interest is calculated on one single figure while compound interest is calculated over the opening figure of month,quarter or year.
So compound interest gives more interest income and hence it's better than simple interest bond.
Wiki User
∙ 14y ago
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