Question

Difference between compound interest and simple interest

Answer 1

Simple interest = P*R*T/100
compound interest

Answer 2

Simple interest is what you get when calculate the interest of all the years together. Compound interest is what you get when you calculate the interest for each year independently and calculate the total accumulated amount.

I know that's a bit confusing so here is an example:

Z deposits $500 into an account for 2 years at a rate of 3%

(p=500, t=2, r=3)

Using simple interest:

I=(ptr)/100

 =(500 x 2 x 3)/100

 =(3000)/100

 =30

$500 + $30 = $530

Using compound interest:

I=(500 x 1 x 3)/100

 =(1500)/100

 =15

$500 + $15 = $515

I=(515 x 1 x 3)/100

 =(1545)/100

 =15.45

$500 + $15.45 = $515.45

Simple interest=$530

compound interest=$515.45

See the difference?