Understanding Interest: Simple vs Compound

The video tutorial introduces the concept of interest, explaining its significance in financial contexts. It covers the basics of simple interest, illustrating how it is calculated as a percentage of the principal amount. The tutorial then delves into compound interest, highlighting the differences from simple interest and demonstrating how it accumulates over time. Through examples, the video shows the financial impact of compound interest compared to simple interest, emphasizing the importance of understanding these concepts to avoid financial pitfalls.

What is the basic concept of interest as described in the video?

• A tax on financial transactions

• A fee for borrowing money

• A reward for saving money

• A penalty for late payments

In the example given, how much interest is paid on a $100 loan after one year at 10% interest?

• $5

• $10

• $15

• $20

How is simple interest calculated?

• By dividing the principal by the interest rate

• By adding a fixed amount each year

• By multiplying the principal by the interest rate and the number of years

• By compounding the interest annually

What is the principal amount in the context of interest?

• The original amount borrowed or invested

• The final amount after interest

• The interest rate percentage

• The total amount of interest paid

How does compound interest differ from simple interest?

• It is calculated only once at the end of the term

• It is calculated on the initial principal only

• It is a fixed amount added each year

• It is calculated on the principal and accumulated interest

What happens to the principal in compound interest calculations?

• It decreases over time

• It remains constant throughout

• It is divided by the interest rate

• It increases as interest is added

After 10 years, how much more does compound interest cost compared to simple interest in the example given?

• $59

• $100

• $200

• $259

What is the formula for calculating compound interest?

• Principal x (1 + Rate)^Time

• Principal / (1 + Rate)^Time

• Principal x (1 + Rate x Time)

• Principal + Rate x Time

Why is compound interest often more costly than simple interest over time?

• Because it uses a higher interest rate

• Because it includes interest on previously accumulated interest

• Because it is calculated less frequently

• Because it is only applied to large sums

What is the key takeaway from the comparison between simple and compound interest?

• Simple interest is always better

• Interest rates do not affect the outcome

• Compound interest grows faster over time

• Both are the same over long periods