Interest is paid at specific intervals, depending on the type of account in which money
is held. It can be paid daily, weekly, monthly, annually, or at the end of an agreed
upon term.
The Interest Rate is a percentage of how much money you have saved. The rate can change
depending on many different factors. Changes in the economy, the stock market, or
government policy are just some of the things that can effect the Interest Rate.
There are two types of interest:
- Simple Interest is paid only on the principal. Principal is the
original amount of money in the account. The following is an example of simple interest:
- If the bank is paying 5% annual interest and you have $100.00 in your account, you
will receive an interest payment of $5.00 after one year. Your new balance is $105.00.
When it's time for your second interest payment, the bank will calculate the interest
on your original balance. You will receive another 5% of $100.00, or $5.00. After
the second interest payment, you will have a balance of $110.00. At the end of 12
simple interest payments, you will have a total of $160.00.
- Compound Interest is paid on the principal, and on the amount of
interest that has been added to it. The following is an example of compound interest:
- If the bank is paying 5% interest, compounded annually, and you have $100.00 in
your account, you will receive an interest payment of $5.00 after one year. Your
new balance is $105.00. When it's time for your second interest payment, the bank
will calculate the interest on your new balance. 5% of $105.00 is $5.25. After
the second interest payment, you will have a balance of $110.25. At the end of 12
compound interest payments you will have a total of $179.55.
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