|Simple Interest assumes that the same amount of interest on an investment is accumulated each year. On the other hand, compound interest does not make the same assertion. Instead, when using compound interest, the interest amount is dependent on the value of the investment at the required time period (usually at the end of a year).|
Alyssa invests $350 at a rate of 4% per annum compound interest for 3 years. Calculate the interest she receives at the end of the 3 years.
Interest for YEAR 2: of
Interest for YEAR 3: of
Since Alyssa started with $350 and ended YEAR 3 with $393.70 the difference in these amounts has to be the interest she received.
ALTERNATELY, we can use a formula as follows:
where is the annual rate of interest.
STEP 2: Substitute needed values into the formula
where is the amount of the investment after years and is the initial investment.
STEP 3: Determine the amount of interest as