In contrast, a five-year compound interest GIC receives an interest deposit into the account at periodic times every year. Only upon maturity does the interest appear. For example, in a six-month simple interest GIC the balance in its account at any point before the maturity date is the original principal and nothing more. Under simple interest, you convert the interest to principal at the end of the transaction’s time frame. This means that interest earned in the previous compounding period will earn interest in all subsequent compounding periods.īut how does compound interest compare to simple interest? The critical difference is the placement of interest into the account. Define terms related to compound interest.Ĭompound interest involves interest being periodically converted to principal throughout a transaction, with the result that the interest itself also accumulates interest.Identify the differences between compound interest and simple interest.
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