Question

What is the difference between simple interest and compound interest? Illustrate your answer. Which one will you prefer as an investor.

Answer 1

Simple Interest = P * r * t/100

where p is Principal, r is rate of interest and t is time period

In simple interest money is accumulated yearly and interest is constant over the year.

In compound interest investor will get interest in every year interest as well.

Let take example if investor want to invest in 1000 for 2 year with 10% interest rate then

in simple interest investor will generate 20% return on the investment

but in compound interest investor will generate 21% return. 1% extra return due to there is interest on interest in 2nd year.

Thus investor should always prefer compound interest because it give higher return in long run .