Introduction Many financial calculations involve interest.
Examples are loans, deposits, and annuities.
Both are expressed as percentages . We will illustrate the difference with an interest-earning deposit. A person makes a deposit with a financial institution, which promises a certain rate of interest per year, paid after specified intervals of time. With simple interest, the amount of the deposit remains the same, and the amount of interest is paid to the depositor at the end of each interval of time. With compound interest, the amount of the deposit rises because the interest is added to the deposit at the end of each interval of time.