Simple interest accrues on the principal only. Compound interest accrues on accumulated interest as well as on principal. If simple interest is applied to a savings account over a five-year period, the future balance will be larger than it would have been had compound interest been applied. If compound interest is applied to a savings account over a five-year period, the future balance will be larger than it would have been had simple interest been applied. To determine the number of periods used in computing a present value, you must know a. the interest rate and the future value.
Annuities consist of payments that are equal in amount.
In an ordinary annuity, the cash flow occurs at the end of the period. The present value of an annuity due is always greater than the sum of the periodic payments. When the interest rate, number of payments and payment amount are the same, the future value of an annuity due is greater than the future value of an ordinary annuity. The first deposit was made on July 1, 1988. John Tracey, M.D., keeps his accounting records on the cash basis.