ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Compound interest, rather than simple interest, must be used to properly evaluate long-term investment proposals. 5. Compound interest uses the accumulated balance at each year end to compute interest in the succeeding year.

Detailed explanation-2: -Simple interest is based on the principal amount of a loan or deposit. In contrast, compound interest is based on the principal amount and the interest that accumulates on it in every period.

Detailed explanation-3: -Why do you end up with more money with compound interest? Simple interest is interest paid only on the original investment whereas compound interest paid both on the original investment and on all interest that has been added to the original investment.

Detailed explanation-4: -Compound interest is computed on principal and on any interest earned that has not been paid or withdrawn. It is the return on (or growth of) the principal for two or more time periods.

Detailed explanation-5: -What is the difference between simple and compound interest? Simple interest is interest payment is calculated on only the principal amount; whereas compound interest is interest calculated on both the principal amount and all the previously accumulated interest.