Understanding interest rates
posted by Anonymous .
What would be the diffrence in earning between simple and compound interest if your initial balance was $1,000 rather than $100?
What would be the diffrence in earnings between simple and compound interest on your $100 saving after five years?
MY ANWER: there won't be a diffrence.
I have no idea how to do this I'm just guessing..
Naturally, there must be some difference, or there would be no need for two different terms.
If you invest $1000 at simple interest, say 5%, then every year you collect $50 interest, or 5% of $1000.
A chart of principal and interest for a few years would look like:
. . .
However, with compound interest, when the interest is paid, it becomes part of the principal for the next year. So, its chart would look like
. . .
as you can see, compound interest grows faster than simple interest.