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Question Description

Simple and Compound Interest Compared

What are the differences between simple interest and compound interest? Which type of interest would you prefer to receive as an investor? Why?

Just response each posted # 1 to 3 down below only.

Posted #1

Hello Professor and class,

What are the differences between simple interest and compound interest? Which type of interest would you prefer to receive as an investor? Why?

The main difference between simple interest and compounded interest is the way that interest is accrued . simple interest only pays interest on the funds invested where are compounded interest accrues interest on the money invested as well as the interest that has already been earned. For investment purposes i would certainly prefer compounded interest reason being is simple not only do i earn interest on my money but i also earn interest on the money the bank has paid be interest for this is referred to as interest on top of interest .

Posted #2

Hi Everyone

The simple interest, are the interest earned at maturity do not add to the capital to generate new interest. In these cases the owner of the capital can collect the interest generated in each period and is always calculated on the initial capital. The interest obtained in each period of time is always the same. This also implies that interest earned in one period is not reinvested in the next period.

And the compound interest, these are obtained in each period are added to the initial capital to generate new interests. Compound interest, interest is not paid when due and accumulated to capital. Consequently, in compound interest calculations, the debt capital grows at the end of each period of time and, obviously, the interest, calculated on a larger capital, becomes higher in each period than in the previous period. If the interests of a debt are paid periodically at maturity, then this is a case of simple interest.

Reference:

Posted # 3

Hello class and professor,

Simple interest is based on the principal amount of a loan or deposit, while compound interest is based on the principal amount and the INTEREST that accumulates on it in every period.

Therefore, it is easier to calculate and determine the simple interest on any principal amount of a loan or deposit. Not many things in finance use simple interest. One good example is the interest owed on lines of credit such as credit cards, personal line of credit or home equity line of credit. Even though each month the interest is added to the remain principal, but you can easily use simple interest math to calculate it.

Compound Interest is often used in real life situations. In business transactions, investments and financial products, compound interest method is applied due to multiple periods or years. Anything else that under 1-year time line will most likely use simple interest.

Reference

Kieso, D. E., Weygandt, J. J., & Warfield, D. T. (2016). Intermediate Accounting; 16th Edition.Various: John Wiley & Sons, Inc.

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