# With simple interest the interest is not reinvested

This preview shows page 1. Sign up to view the full content.

This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: th simple interest, the interest is not reinvested, so interest is earned each period is on the original principal only. √Interest on Interest... Suppose you locate a two-year investment that pays 14 percent per year. If you invest \$325, how much will you have at the end of two years? How much of this is simple interest? How much is compound interest? At the end of the first year, you will have \$325 x (1 + .14) = \$370.50. If you reinvested this entire amount, and thereby compound the interest, you will have \$370.50 x1.14 = \$422.37 at the end of the second year. The total interest you earn is thus \$422.37 -- 325 = \$97.37. Your \$325 original principal earns \$325 x.14 = \$45.50 in interest each year, for a two-year total of \$91 in simple interest. The remaining \$97.37 -- 91 = \$6.37 results from compounding. How much will you have in the third year? Suppose you go in for an interview for a part-time job. The boss offers to pay you \$50 a day for a 5-day, 10-week position OR you can earn only one cent on the first day but have your daily wage doubled every additional day you work. Wh...
View Full Document

## This note was uploaded on 01/30/2014 for the course ECONOMICS Banking an taught by Professor Jones during the Fall '10 term at Homestead Senior High School, Fort Wayne.

Ask a homework question - tutors are online