The Simple Dollar » Explaining Simple Interest, Compound Interest, AP.
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Explaining Simple Interest, Compound Interest, APR, and APY
1comment
November 28, 2006 @ 12:03 pm  Written by
Trent
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Recently, my niece was trying to calculate how much money would be in her savings account in six months.
She was using the APY as a simple interest rate and thus was coming up with a number larger than what would
actually be in her account. It was a small difference, but she seemed to believe the bank was “ripping her off”
and was quite upset over the matter.
Although people who astutely follow their own personal finances are quite aware of the differences between
these three things, many people believe that all interest rates are basically the same. The fact is that they’re
quite different, and knowing and understanding these differences can make a huge difference in the amount of
money you can expect to pay on your bills and make on your investments.
Most people believe all interest functions like simple interest.
Simple interest basically is the amount you
borrowed times the interest rate.
In other words, 5% interest on $1,000 is $50. This is the rule most of us are taught in primary school and the
one that is most ingrained in our minds, but it’s
not
the method that most businesses use when calculating
interest.
The simple fact of the matter is that
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 Fall '11
 MariselaA.Martinez
 Interest Rates, Interest, Credit card, compound, Simple Dollar

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