In the real world, simple interest is normally used for a single period of less than a year, such as 30 or 60 days, because it is calculated on the original amount only. If your interest accumulated annually, you'd get a very different sum.
Compound interest is interest that accumulates on the original amount and all money that accumulated during each period.
The formula for compound interest is:
where A represents the final amount, t represents the time in years, p is teh principal (starting amount), and r is the interest rate expressed as a decimal.
Keisha has $90 in a savings account. The interest rate is 10%, compounded annually. To the nearest cent, how much interest will she earn in 2 years?
A= p(1 + r)t
Write the rate as a decimal.
10% = 0.1
Calculate the balance.
Now use this to find the interest, which is the balance minus the principal.
$108.90 – $90 = $18.90
The interest will be $18.90.