Compound Interest & Simple Interest

Compound interest and simple interest

• Simple interest is calculated only on the original principal.
• Compound interest is calculated on principal plus previously earned interest.

Formulas:

$A=P(1+rt)$

$A=P{\left(1+\frac{r}{n}\right)}^{nt}$

Where:

• P = principal
• r = annual rate
• t = time
• n = compounding frequency

The longer the horizon and the more frequent the compounding, the larger the gap between simple and compound growth.

This note feeds directly into APR and EAR and Time Value of Money.