What is the similarity between simple interest and compound interest?

Answer 1

Simple interest is calculated on the principal only. If you have $1,000 and earn 5% interest per year, you will receive $50 at the end of year one. At the end of year two, you will receive another $50. And on it goes.

With compound interest, you earn interest on the principal plus any interest you previously earned. Looking again at the previous example, at the end of year one you will still receive $50. At the end of year two, however, you will receive $52.50. Why? Because the 5% is paid on the principal PLUS the interest you previously earned. At the end of 10 years, you'll receive $77.57. After 20 years, $126.35. With simple interest you would still receive only $50.

Answer 2

No.

The "simple interest" method of calculation does not compound interest. It takes the annual interest rate and divides it by 365 to get the daily rate. The daily rate is then multiplied by the current balance to get the amount of interest that accrues per day. This interest is kept in a separate account from the principle, and interest does not accrue on the balance of that account.

In compound interest, the principle and interest are kept in the same account, so interest accrues on past interest.

Answer 3

Simple interest is calculated on the original principal amount only. Accumulated interest from prior periods is not used in calculations for the following periods. Simple interest is normally used for a single period of less than a year, such as 30 or 60 days.

Compound interest is calculated each period on the original principal and all interest accumulated during past periods. Although the interest may be stated as a yearly rate, the compounding periods can be yearly, semiannually, quarterly, or even continuously.

Answer 4

Compound interest is when interest is charged on the principal plus the interest. An example is a credit card debt. If you carry a balance from month to month you are charged interest on the total amount owed including the interest from previous months. Simple interest is calculated on the amount borrowed over a fixed amount of time and does not charge interest on the interest.