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# THE CONNECTION BETWEEN COMPOUNDING AND SIMPLE INTEST

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what is the connection betweent the compounding Intrest formula and the repeated applications of simple intrest

Guest Feb 15, 2017
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1) In compounding you get "interest on interest". Example: \$1,000 that earns interest @ 6% compounded annually. So, for the first year you get: 6/100 x 1,000 =\$60. But in the second year you get: another \$60 + \$60 of year 1 + interest on this last amount @ 6%, which comes to \$3.60, for a total of: \$60+\$60+\$3.60=\$123.60 for 2 years.

2) In simple interest you just get \$60 year after year after year!. So, in 2 years you get \$60 x 2=\$120.

Now, for 2 years there doesn't seem to be that much difference. But if you went for 20 years, then the difference between the two would as follows:

a) - In 20 years using compounded interest, you would have:\$2,207.14 in interest ONLY.

b) - In 20 years using simple interest, you would have: \$60 x 20 =\$1,200 in interest ONLY.

Now, you can see the power of componding interest vs simple interest.

Guest Feb 15, 2017