What Is The Difference Between Simple and Compound Interest Rate?
Assume you make a deposit into a bank account
A) If the Bank pays you simple interest the interest payment each year will be the same and will be the interest rate times the initial amount.
Eg. I put $100 in my bank and the bank pays me 10% p.a., I will get $10 (10% * $100) every year.
B) If the bank pays you compound interest you will receive interest payments not just on the initial amount but also on previous interest payments
Eg. I put $100 in my bank and the bank pays me 10% p.a., I will get:
1. $10 (10% * $100) in my first year
2. $11 (10% * ($100 + $10 interest from first year)
etc