Question

define simple interest and compound interest with example

Answer 1

Here, the lender levies interest only on the amount he has loaned. The former is the type of interest where the interest is charged only on amount loaned originally. So, simple interest is the sum paid for using the borrowed money, for a fixed period. It is essentially a percentage of the actual loan charged for the borrowing tenure. For instance, when you put an FD of Rs. 1 lakh in a bank at the rate of 7% for one year, the bank uses your money for its operations in that duration. In exchange for that you will receive Rs. 7000 interest income annually.

See how easy and quick it is to estimate simple interest! Auto loan is another example for this. The more money you borrow/lend and the longer the tenure is, the greater will be the interest.Here is how you calculate simple interest.

2. Compound Interest

Compound interest means the money you make other than simple interest income from your invested capital. So, your investment grows dramatically thanks to the power of compounding. Basically, it gives you potential to earn more than regular simple interest on your capital. It is up to the bank (or financial institute) to decide how often the interest can be compounded – daily, monthly, quarterly, six-monthly or annually. With more frequency, your interest accrual will also increase.

Of course, compound interest is highly beneficial as the pace of wealth growth is more here. For instance, if you invest Rs. 5000 at the rate of 10% interest and it compounds annually for 3 years, your corpus (investment + gains) will be Rs. 6655. Your gains will be Rs. 1655 as opposed to the Rs. 1500 you will make in simple interest. Again, if you increase the frequency of compounding from once a year to more, the interest income will be even higher. Therefore, finding out the compounding frequency can help you make a more lucrative choice when it comes to investing.

Answer 2

Answer:

#khushu

Step-by-step explanation:

Interest is the cost of borrowing money, where the borrower pays a fee to the lender for the loan. ... Simple interest is based on the principal amount of a loan or deposit. In contrast, compound interest is based on the principal amount and the interest that accumulates on it in every period.