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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