Ready For Finance

Simple interest

Ready-For-Finance Dictionary

If you earn simple interest on money you deposit in a bank or use to purchase a certificate of deposit (CD), the interest is figured on the amount of your principal alone.

For example, if you had $1,000 in an account that paid 5% simple interest for five years, you'd earn $50 a year ($1,000 x .05 = $50) and have $1,250 at the end of five years.

In contrast, if you had been earning compound interest, you'd have $1,276.29 at the end of five years, since the interest you earned each year, as well as your principal, would have earned interest.

TERM ID: 961