📚 Simple & Compound Interest
Interest calculations are fundamental to finance. Understanding the difference between simple and compound interest is crucial for loans, savings, and investments.
Simple Interest:
Where: I = Interest, P = Principal, r = rate (as decimal), t = time (years)
Example: Simple Interest
You deposit $5,000 at 4% annual simple interest for 3 years.
Total amount after 3 years: $5,000 + $600 = $5,600
Compound Interest:
Where: A = Final amount, P = Principal, r = rate, n = compounds per year, t = years
Example: Compound Interest (Annual)
You invest $1,000 at 5% annual interest compounded yearly for 2 years.
💡 Key Insight: With compound interest, you earn interest on your interest! This makes your money grow faster than simple interest over time.
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Calculate the simple interest on $5,000 at 4% annual rate for 3 years.
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What's the compound amount (total A) of $1,000 at 5% compounded annually for 2 years?
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