APR vs APY 02 - The Simple Dollar Explaining Simple...

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The Simple Dollar » Explaining Simple Interest, Compound Interest, AP. .. http://www.thesimpledollar.com/2006/11/28/explaining-simple-interest. .. 1 of 6 2/28/2007 12:23 AM Search Search: Go home about ads contact best of. .. get via email Explaining Simple Interest, Compound Interest, APR, and APY 1comment November 28, 2006 @ 12:03 pm - Written by Trent Categories: Getting Started Bookmarks: del.icio.us , digg , reddit 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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APR vs APY 02 - The Simple Dollar Explaining Simple...

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