
Simple interest is calculated on the original principal only. Accumulated interest from prior periods is not used in calculations for the following periods. It is normally used for a single period of less than a year, such as 30 or 60 days. Compound interest is calculated each period on the original principal and all interest accumulated during past periods. Although the interest may be stated as a yearly rate, the compounding periods can be yearly, semiannually, quarterly, or even continuously.
Compound interest can be thought of as a series of backtoback simple interest contracts. The interest earned in each period is added to the principal of the previous period to become the principal for the next period. Example Find the value of a $1000 savings account after 4 and half years if the account pays 6% interest compounded semiannually. Solution: 6% interest compounded semiannually means that the interest is paid twice a year or every 6 months. The interest rate is 6% divided by 2 that is 3%. Rate = 0.03 (The rate is entered as decimal) The interest is added to the principal every 6 months.
Directions: Solve the following problems. Also write at least 5 examples of your own. 