Simple interest can be found by the formula A = P(1 + r n) where P is the principal (initial amount), r is the rate (usually annual), n is the number of periods (usually years).
Compound interest can be found by the formula A = P (1 + r /k)^(kn) where r is the annual rate, k is the number of times the interest is compounded in a year and n is the number of years.
The difference between the simple and compound interest is that the simple interest earned does not change the amount of interest added next time, whereas the compound interest is added to the principal and next time generates additional interest and so on.
Usually the statement of a problem must specify whether the interest is simple or compound, for example, by expressions as "compounded monthly".
Apr 16th, 2015
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