Zulfiqar Hasan, Associate Professor (Finance)

Simple interest refers to interest earned only on the original capital investment amount. Compound interestrefers to interest earned on both the initial capital investment and on the interest reinvested from prior periods.

From same amount of investment, one can get more money investing in compound interest rather then simple interest. Students can follow 4 easy steps to findout the difference.

First Sept: Calculate Future value

Second step: Finding the compound interest

Third Step: Calculate the Simple interest

Fourth Step: Subtract Compound interest amount from simple interest amount.

Example 01: What will be the interest amount difference between simple interest and compound interest if you invest Tk 100 for 3 years @10% interest?

Solution:

First Step: Calculating the FV

Second Step: Calculating Total Compound Interest (CI)

Formula for Compound Interest:           CI = FV – PV

So, CI = Tk 133.10 –Tk 100 = Tk 33.10

Third Step: Calculating Simple Interest (SI)

Simple Interest (SI) = (PV)(n)(i)

Fourth Step: Calculating Interest Difference (ID)

Interest Difference (ID) = CI –SI

ID = Tk 33.10 – Tk 30 = Tk 3.10

Practice 01: Suppose you have deposited Tk 10000 in a bank for three years. Bank gives you 12% interest annually. Calculate the followings:
a. Future Value (FV)
b. Compound Interest of Three Years
c. Simple Interest for Three Years
d. Interest Difference