Compound and Simple Interest?

Question

Brief explain why you would prefer to deposit $10,000 over 5 years at 10% compound interest rather than at 10% simple interest.

Answer 1

When you invest your money, you want to know that you get more return than what you could have gotten with very little risk.   US Treasuries and Bonds are said to be low risk.  So if your compound interest on your investment is less than what you could have gotten with a discount rate that is safer, you lose money relative to inflation, relative to how much money you could have made in a safe situation.

So if the discount rate is 10% and you only make 8%, you lose money relative to the safer investment possibility.

Hope this helps...

I'd love to be able to get 10% discount rate though!  lol  Like that is ever gonna happen!

Answer 2

simple interest is the whole interest for a certain sum of money, for a certain time.....like as u said, simple interest will be calculated for 5 years at one time.....its formula is Simple Interest=(Sum of money * Rate of interest * time)/100

in above case, S.I.=(10000*5*10)/100=5000

that means after 5 yrs, u'll get $10000+$5000=15000

Now, for compound interest, the thing is same but the calculations r made from year to year....

compound interest is calculated per year...

for example, the interest for 1st year+ the sum will become the principal for next year....the formula i explained above will be calculated per year and not for whole term(5 years)....

First calculate interest for 1st year...

sum=$10000

rate=10%

time=1 yr

Interest=(10000*10*1)/100=1000

Amount for 1st year= 10000+1000=$11000

Now this amount becomes principal sum for second year and the interest is calculated on that....same thing is repeated for 5 times...

COMPOUND INTEREST IS THE INTEREST ON INTEREST AMOUNT.....Hence, it is more than Simple interest, which is for whole span...

I Think u've got some idea....i've tried my level best...

Answer 3

Because compound interest is interest added to that interest assimilated. Simple interest is rather 'flat' as it does not earn interest on the extra interest collected.