Illustrating Simple and Compound Interest

Unraveling the Mysteries of Interest: Simple vs. Compound

• Illustrate the concepts of simple and compound interest, understanding how they work visually.
• Distinguish between simple and compound interest, identifying their key differences and how they impact financial growth.

Good Job!

This lesson lays the groundwork for understanding two fundamental interest calculation methods: simple interest and compound interest. Let's break down the key concepts!

Simple Interest: A Straightforward Approach

Simple interest is calculated only on the principal amount. It's like a fixed fee you pay each year for borrowing money.

Example: If you borrow P10,000 at a 5% simple interest rate for 3 years, you'll pay P500 in interest each year (P10,000 x 0.05). Over three years, your total interest payment would be P1,500 (P500 x 3).

Compound Interest: The Snowball Effect

Compound interest is where things get interesting (pun intended!). With compound interest, you earn interest on your initial principal and on the accumulated interest from previous periods. This creates a snowball effect, leading to exponential growth over time.

Example: Let's say you invest P10,000 at a 5% interest rate compounded annually for 3 years:

• Year 1: You earn P500 in interest (P10,000 x 0.05), bringing your total to P10,500.

• Year 2: You earn interest on the new principal of P10,500, resulting in P525 in interest (P10,500 x 0.05). Your total is now P11,025.

• Year 3: You earn interest on P11,025, and so on.

As you can see, compound interest allows your money to grow much faster than simple interest, especially over longer periods.

Ready to show off your understanding of interest? This assessment will test your ability to differentiate between simple and compound interest, showcasing your knowledge through illustrations and explanations.

Mastered the basics of simple and compound interest? Let's put your knowledge to the test in Lesson 2!