Chapter 1
Linear Equations and Graphing
Course: Gre
Subject: Gre Quantitative Reasoning
Chapter: Rates Ratios And Financial Math
Introduction: Two Paths to Growth
When you deposit money in a bank or take out a loan, the interest calculation method makes a significant difference over time. Simple interest is straightforward—it pays only on the original amount. Compound interest is more powerful—it pays on the original amount plus any accumulated interest.
This lesson will provide a comprehensive comparison of these two interest types, helping you understand when each is used, how they differ, and why compound interest is often called the "eighth wonder of the world."
Defining the Terms
Simple Interest:
- Interest calculated only on the principal (original amount)
- The interest amount is the same each period
- Growth is linear (straight line)
- Formula: I = P × r × t
Compound Interest:
- Interest calculated on the principal plus accumulated interest
- The interest amount increases each period
- Growth is exponential (curved upward)
- Formula: A = P(1 + r/n)^(nt)