## How simple and compound Interest are calculated Simple Interest Calculation

Dollar Amount x Interest rate x Length of Time (in years) = Amount Earned

Example

•  If you had \$100 in a savings account that paid 6% simple interest, during the first year you would earn \$6 in interest.

\$100 x 0.06 x 1 = \$6

At the end of two years you would have earned \$12.

The account would continue to grow at a rate of \$6 per year, despite the accumulated interest.

Compound Interest Calculation

Interest is paid on original amount of deposit, plus any interest earned.

(Original \$ Amount + Earned Interest) x Interest Rate

x Length of Time = Amount Earned

Example

• If you had \$100 in a savings account that paid 6% interest compounded annually, the first year you would earn \$6.00 in interest.

\$100 x 0.06 x 1 = \$6

\$100 + \$6 = \$106

With compound interest, the second year you would earn \$6.36 in interest.

The calculation the second year would look like this:

\$106 x 0.06 x 1 = \$6.36

\$106 + 6.36 = \$112.36

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