Compound interest is calculated on the principal, as well as on any interest already earned. Use compound interest when the question explicitly uses the term "Compound".Example:John takes out a $10,000 loan at an annual interest of 12%, compounded semiannually. what will be the balance of the loan at the end of the year?Notice the following:1) Interest rate = 12% annual2) Time - 1 year3) Compound - semiannually. Interest is calculated after six months, then again at the end of the year.
That's pretty cool. Can I see an example?Sure.In the beginning of 1997, Priscilla invested $5,000 in a savings account that that pays 8% annual income, compounded quarterly. If Priscilla makes no further deposits into or withdrawals from the account, approximately how much money will she have in the account two years later, at the end of 1998?$800$858$5,800$5,858$10,000
For interest questions, Notice the following three pieces of the puzzle:1) Interest rate - usually given as a %2) Time - How long the interest is calculated for.3) Compounded - Annually, semi-annually (every six months), quarterly, monthly.Simple Interest formula = Principal Rate TimeUse simple interest in the following cases:1) The question explicitly use the phrase "simple interest"2) The calculation time for the interest is shorter than the stated interest period. e.g. 12% annual interest calculated after a 6-month time period.
Some GMAT questions will introduce the concept of interest earned on a Principal. These questions are easily identified by the use of the term "Interest" somewhere in the question (Duh!).We recognize two different kinds of interest - Simple interest, and Compound interest. Look for the following three pieces of the puzzle in the question:1) Interest rate - usually given as a %2) Time - How long the interest is calculated for.3) Compounded - Annually, semi-annually (every six months), quarterly, monthly.