Essay Sample on Calculating Money With Interest: Simple vs. Compound Interest

Introduction

In the scientific applications for money calculations, interest is the primary concept used in the forecast for money accumulation and the outcome after a specific period. In simple understanding, the benefit is identified as the total amount of money paid for its use in either percentage or amount. In the useful money calculation, various types of benefits are applied in the calculation of payment that includes classes such as the simple interest and compound interests (Cairns, 2018). Simple interest is used by the computation carried out on the principal amount of money as a loan. On the other hand, compound interest is also used in the forecast for money accumulation but includes the method of estimates of the total collection of earned interest and the principal amount deposited initially. Therefore, this paper presents a comprehensive analysis of the contrast and comparison of simple and compound interest as applied in mathematical concepts.

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Simple Interest

In the simple understanding of the application of simple interest, it is identified as the rate at which money is borrowed or lent. Specific terms and formulas are significantly applied in the calculation of the simple interest that is used in the understanding of the value of money when accumulated over a particular period. In the application of simple interest concepts, specific terms are used in the knowledge of the procedure of calculations and expectation in the complete evaluation (Hicks, 2017). For instance, the vocabulary, Interest, is used to define the added amount of money to the deposited amount of cash or borrowed loan or investment over a specific period and in accordance to the applicable interest rate. The principle is also an appropriate term used in the mathematical calculation of simple interest rates; the term principle is used to define the initial amount of money deposited, borrowed, or invested. Lastly, the term interest rate is used to describe the percentage applied to the accumulated amount of money; interest rates significantly depend on the time the money is deposited, borrowed, or invested.

Ethical Issues used in Calculation of Simple Interest Rates

In the application of mathematical concepts, pertaining simple interest calculations, specific agreements are made that involves the realization of ethical issues. For instance, when an individual borrows a particular amount of money for a specific period, an understanding of paying back is made with the possible interest gained from the borrowed or deposited money thus making the ethical issue application significant in the concept of simple interest calculations (Lusardi & Mitchel, 2017). The moral issue applications in the simple interest understanding are substantial since it assists in help in the realization of the feature maturity value. The feature value is identified as a total amount of money an individual is intended to pay back from obtaining a loan or achieve after accumulating from the deposited cash. Future value is also identified as the value of maturity. The ethical issue is therefore used to realize the formula A= P+ I that is used to calculate simple interest. P is used to indicate the principle; I used to represent interests while A is used to describe the maturity value.

Real World Application of Simple Interest

In real life application, the concept of simple interest is used in four primary forms in real life. For instance, the simple interest calculation is discussed in the processes such as application for the car loans, demand for consumer loans, certificates of depots, and the making of new payment deposits.

Car loans application. The car loans applications are rewarded every month that indicates parts of the loans are used to repay for the outstanding balance for the car loan every month, and the remaining balance is used to pay for the interest. The payable interest for the car loan reduces every month with the diminishing balance of the outstanding loans.

Early payments Discount. In the corporate world, suppliers consistently encourage initial payment for their invoices by offering discounts to customers (Hicks, 2017). For instance, a supplier who expects a fifty thousand US dollar invoice payment may give some discount percentage within a specific month, thus applying the concept of simple interest in the real world application.

Compound Interest

Compound interest is also identified as compounding interest; it applies the concept where the calculation of interest is carried out on the initial principal including the interest accumulated in the previous periods of deposit, investment or loan. The idea is identified as the obtaining of interest on interest, therefore, making more sum growth of the accumulated money as compared to the notion of simple interest that only involve the accumulation on the initial principal amount deposited, invested or borrowed (Lusardi & Mitchel, 2017). The compounding frequency is more applicable to the realization of the rate at which compound interest accumulates.

Ethical Issues on Compound Interest

In the understanding of the working principles that apply compounding interests, several ethical issues are involved to avoid the misunderstandings of the agreement (Cairns, 2018). For instance, the ethical issue applied in the compounding interest involves the realization that the compound interest is attained by multiplying the amount of the initial principal once and adding the yearly interest rate raised to the approximated number of compounding period subtracting one assumed to be the initial year of compounding (Hicks, 2017). The initial totaling amount of the obtained loan is achieved after the subtraction from the obtained value. A = P1 + rnnt.

Real World Application of Compound Interest

In real life application, the concept of compounding interest is used significantly in profit generation activities for the affected organization. For instance, an organization works on impressing the investors to the company by applying the concept of compound interest to earn them unexpected profits (Lusardi & Mitchel, 2017). The financial managers distribute investor's dividends after a specific period. Higher benefits are achieved in the subsequent years in cases where the compounded profits are accumulated and reinvested. Benefits are therefore grown effectively by applying the concept of compound interests, thus identified as a profit multiplier due to the calculated interest in the previous investment.

Conclusion

In general, both the compound interest and simple interest works with the principle of growing the value of money. Both apply the mechanism indicates that after some period, the amount of money deposited in the account credit, borrowed or invested increases in value. Both depend on the calculation on the initial deposit identified as the principal to mention the actual amount needed to realize the resulting value. On the other hand, both simple interest and compound interests are different in specific ways (Hicks, 2017). For instance, the calculation of simple interest is only achieved at the basis that some principal has been borrowed or invested. However, compound interest is calculated on the initial money deposited alongside the accumulated benefits in the previous periods. Simple interests are also used in short term periods, while compound interests are used in long-term investments or money value accumulations.

References

Cairns, A. J. (2018). Interest rate models: an introduction. Princeton University Press.

Hicks, J. R., (2017). From 'Value and Capital.' In Bond Duration and Immunization (pp. 57-61). Routledge.

Lusardi, A., & Mitchell, O. S. (2017). How ordinary consumers make complex economic decisions: Financial literacy and retirement readiness - quarterly Journal of Finance, 7(03), 1750008.