Simple Interest and Compound Interest
Definition
Simple interest is interest calculated on the assumption that there is no opportunity to re-invest the interest payments during the life of an investment and thereby earn extra income.
Compound interest is interest calculated on the assumption that interest amounts will be received periodically and can be re-invested (usually assumed to be at the same rate).
How are they used?
Simple interest
On short-term instruments, interest is usually ‘simple’ rather than ‘compound’. Suppose, for example, that an investor places £1 on deposit at 8% per annum for 92 days. He expects to receive all the interest at the end of the period – in this case after 92 days. The 8% is, however, quoted per annum, so that ...
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