Simple and Compound Interest

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Simple vs. Compound Interest

The following two examples of methods of computing interest on a principal sum illustrate the differences between simple interest and compound interest. Both examples use a $100 principal and 7% interest.

Simple Interest

The interest rate is applied only to the original principal amount in computing the amount of interest.

Year		Principal($)	Interest($)	Ending Balance($)
1		100.00	7.00	107.00
2		100.00	7.00	114.00
3		100.00	7.00	121.00
4		100.00	7.00	128.00
5		100.00	7.00	135.00

	Total interest 35.00

Compound Interest

The interest rate is applied to the original principle and any accumulated interest.

Year		Principal($)	Interest($)	Ending Balance($)
1		100.00	7.00	107.00
2		107.00	7.49	114.49
3		114.49	8.01	122.50
4		122.50	8.58	131.08
5		131.08	9.18	140.26

	Total interest 40.26

All other things being equal, compound interest has a larger effect as the time period increases and as the interest rate increases.

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