Help please + need explanation
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Answer:
Compound Interest
Step-by-step explanation:
When the interest is paid on principal amount only, then there is fixed return in case of a specified rate.
For example: Simple interest @ 5% on principal value of $100 shall be
$100 5% = $5 each year
Even though the interest amount is not withdrawn, and kept in the account earning this return.
Although, in case of compound interest:
Principal = $100
Rate = 5%
At the end of year 1, assuming interest is compounded each year
Value of interest = $100 5% = $5
Value of security or investment = $105
Second year interest = $105 5% = $5.25
Value = $105 + $5.25 = $110.25
Whereas in simple interest the value stays constant of principle on which interest is calculated = $100
Thus, total return in 2 years under simple interest = $100 + $5 + $5 = $110
Whereas that in compounded interest, compounded annually = $100 + $5 + $5.25 = $110.25
Thus, value of money increases faster in compound interest.