Question

Investments and loans base their interest calculations on one of two possible methods: the the interest and interest methods. Both methods apply three variables--the amount of principal, the interest rate, and the investment or deposit period-to the amount deposited or invested in order compute the amount of to interest. However, the two methods differ in their relationship between the variables.Assume that the variables I, N, and Pv represent the interest rate, investment or deposit period, and present value of the amount deposited or invested respectively.Which equation best represents the calculation of a future value (FV) using:Compound Interest?FV=PVx(1+I)N
FV=PV+(PVxIxN)
FV=PV/(1+I)NSimple Interest?FV=PV/(1xIxN)
FV=PVxIxN
FV=PV+(PVxIxN)

Answer 1

Answer:

• Compound Interest ⇒ FV = PV x (1 + I ) ^N
• Simple Interest ⇒ FV = PV x I x N

Explanation:

With compound interest the rate of growth needs to be compounded which is why the time period is used to exponentially adjust it.

With simple interest there is no compounding so the value is simply the interest that will be earned every period (which is a constant value) multiplied by the number of periods and the amount to be invested.