Math Is Fun Forum

paulb203

Member

Registered: 2023-02-24

Posts: 136

Is Compound interest sometimes effectively the same as simple interest

I’ve come across questions recently that go something as follows;
Tom invests £2000 for 3 years.
For the first year he gets 3% compound interest...
Then for the next two years he gets x% compound interest. Etc.
I’ve been managing to get the correct answer, but the idea of someone receiving compound interest ‘for the first year’ seems strange to me.
Compound interest by it’s definition seems to me to only make sense if someone receives it for 2 or more years. If they are said to get it for ‘the first year,’ i.e, for 1 year, how does this differ from them getting simple interest for 1 year?
£2000. Compound interest. 3%. 1 year. Savings at the end of 1 year = £2060
£2000. Simple interest. 3%. 1 year. Savings at the end of 1 year = £2060

Is that correct?

Jai Ganesh

Administrator

Registered: 2005-06-28

Posts: 46,267

Re: Is Compound interest sometimes effectively the same as simple interest

Hi paulb203,

If Compound Interest is for 1 year compounded annually and Simple Interest is for 1 year, the two are the equal.

Please see the links for better understanding.

Interest.

Sumple Interest.

Compound Interest.

Hope this helps!

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It appears to me that if one wants to make progress in mathematics, one should study the masters and not the pupils. - Niels Henrik Abel.

Nothing is better than reading and gaining more and more knowledge - Stephen William Hawking.

amnkb

Member

Registered: 2023-09-19

Posts: 253

Re: Is Compound interest sometimes effectively the same as simple interest

I’ve come across questions recently that go something as follows;
Tom invests £2000 for 3 years.
For the first year he gets 3% compound interest...
Then for the next two years he gets x% compound interest. Etc.
I’ve been managing to get the correct answer, but the idea of someone receiving compound interest ‘for the first year’ seems strange to me.
Compound interest by it’s definition seems to me to only make sense if someone receives it for 2 or more years. If they are said to get it for ‘the first year,’ i.e, for 1 year, how does this differ from them getting simple interest for 1 year?
£2000. Compound interest. 3%. 1 year. Savings at the end of 1 year = £2060
£2000. Simple interest. 3%. 1 year. Savings at the end of 1 year = £2060

Is that correct?

interest doesnt have to compound only once a year
it can be compiounded quarterly/monthly/weekly/daily
then one year of compounded will be more than one year of simple

paulb203

Member

Registered: 2023-02-24

Posts: 136

Re: Is Compound interest sometimes effectively the same as simple interest

Thanks, guys.

sologuitar

Member

Registered: 2022-09-19

Posts: 467

Re: Is Compound interest sometimes effectively the same as simple interest

I’ve come across questions recently that go something as follows;
Tom invests £2000 for 3 years.
For the first year he gets 3% compound interest...
Then for the next two years he gets x% compound interest. Etc.
I’ve been managing to get the correct answer, but the idea of someone receiving compound interest ‘for the first year’ seems strange to me.
Compound interest by it’s definition seems to me to only make sense if someone receives it for 2 or more years. If they are said to get it for ‘the first year,’ i.e, for 1 year, how does this differ from them getting simple interest for 1 year?
£2000. Compound interest. 3%. 1 year. Savings at the end of 1 year = £2060
£2000. Simple interest. 3%. 1 year. Savings at the end of 1 year = £2060

Is that correct?

Interest, simple interest, compound interest are three different worlds. Learn the definition of each one before solving applications in this regard.