Frequently Asked Questions
What is simple interest?
Simple interest is an investment where the interest you earn does not change throughout the term of the investment. This is because there are no added funds to your initial investment during the term of an investment, so how much money your initial investment earns stays constant.
How do I calculate simple interest?
The formula used to compute simple interest is:I = PinIn this formula, the variables are defined as follows:I = Simple interest in dollarsP = Principal amounti = Interest raten = Number of periods
What is compound interest?
Compound interest is an investment where the amount of the return on your initial investment is added to that initial investment and then earns interest. A compounding period is any time interval when this process occurs, whether it be each day, each quarter, or each year.
How do I calculate compound interest?
The formula used to compute compound interest is:Compound interest = Compound amount – Principal amount
What are the differences between simple interest and compound interest?
The main difference is how the return on your initial investment is paid. Simple interest means that you earn a flat percentage of your initial investment for each period, while compound interest means that you earn both principal and interest for each period. Therefore, if an investment compounds more often than annually, the return you earn will be more than what you would earn with simple interest.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.