Tutorial:Calculating Interests

Tutorial:Calculating Interests

Donald TaylorDonald Taylor

Simple Interest• Simple interest is a type of interest that increases

at a steady rate. This means that simple interest will start with a percentage of your initial value and the value of that percentage will be your steady increase rate. This is called the multiplier. This type of interest is basically an arithmetic sequence. For example if you have $300 and your simple interest rate is 10% per year which means your multiplier for each year is 0.1 of the initial value. Your increase rate will be $30.00 per year each year. An example of this can be viewed in the Algebra 2 textbook in problem FX-1. This problem can also be seen on the next page with another description.

Simple Interest Cont’d.

• FX–1

• In this problem you can see that total amount of money increases by $8.00 each year. This is an example of simple interest. The percentage taken from the initial value was 8%. Therefore multiplier is 0.08 of the initial value. Each year the value of the percentage taken from the initial value is added to the total value. In this case the total added was $8.00 a year.

Compound Interest

• Compound interest is a type of interest that increases at a geometric rate. This means that Compound Interest is decided by the total amount you have after each increase period. For example if you have $300 and your compound interest rate is 10% per year. In this case your multiplier would be 0.1 of the total value. Your increase rate will be $30 for the first year, which will leave you with $330. Then your next interest rate will be 10% of that, which would be $33, and so on. An example of this can be viewed in the Algebra 2 textbook in problem FX-2. This problem can also be seen on the next page with another description.

Compound Interest Cont’d.

• FX–2

• In this problem you can see that the total amount of money is 8% of the new total value from the previous year. This means the multiplier for this problem is 0.08. Since the increase rate for this problem is 8% of the previous value, the value for the 4th year would be 136.05.

So which is better?

• FX-1 FX-2

• In these two problems the total amount at the end of the two years is completely different. This is the outcome of Simple and Compound interests. No matter what the total of the compound interest will always be more than the simple interest if they have the same initial value because the increase rate of the compound interest will always be increasing. Therefor Compound Interest is better.