¶ … interest and compound interest? Why is knowing the difference important? What is the formula for determining the future value of an amount? Why is a dollar today worth more than a dollar received in the future?
First Student Response:
Interest in financial terms is when your initial investment yields benefits. You invest an amount and a percentage of that basic investment turns into financial surplus. You gain funds through your investment. There are two types of interest: simple interest and complex interest (Buckelew). Simple interest is when the amount gained does not change. There is a formula which goes I (interest) = P (principle) multiplied by r (rate of interest) and multiplied again by t (time). So the interest you get is based on the amount you put in, the rate of interest, and the time you leave your interest to grow. Compound interest is more complicated than this. In this form, interest is accrued not just on the principal but also on all the interest that has already been gathered. Essentially, at the end of the period of the compound, the interest is added to the principal and sort of reinvested. Due to this, the interest from a compound interest investment will be far greater than one of simple interest. Knowing this difference is very important because it can impact your financial situation. For example, in investing your money in a bank account, you will receive simple interest. However, in other business transactions, such as in a loan or a credit account, the interest will be of the compound variety....
You will not only be paying interest on the principle you borrowed, but also on any interest that balance has accrued since the beginning of your loan. By using the formula already listed here, you can estimate the amount you will either receive or owe depending upon which side of the investment or loan you are on. The value of the things continually changes which is why a dollar today will be worth more than one in the future.
Second Student Response:
There is something called the time value of money (Lane 2013). What this means is that a dollar you get today is more valuable than one you get another time because you can invest that dollar today which will then get interest from that investment. It might be worth one hundred times what it was when initially invested. However, if you get a dollar in the future, that dollar is only worth a single dollar. Money increases in value over time, so long as it is invested in a reputable manner which provides genuine income. The amount you invest is very important, but so is the type of interest you are dealing with. Compound interest will provide a far higher financial yield than an investment with simple interest. The reason for this is that while simple interest only pays out based upon the principle, the rate of interest, and the time you keep your money invested, compound interest also takes into account the amount of interest you have already earned. In this scenario, a dollar today invested with simple interest is less valuable than a dollar invested with compound interest.…
