Question 703897: The differance between simple interset and compound interest of a sum oof money $48 at 20% p.a for 2 years . Find the principal..
(Hint assume principal as100)
Answer by KMST(5328)   (Show Source):
You can put this solution on YOUR website! Following the hint,
if you calculate the interest earned on $100 both ways:
simple 20% p.a. interest for 2 years,
and 20% p.a. compounded annually for 2 years,
you find that compounded interest gives you $4 more.
To get $48 extra from such compounding, you would need to invest 12 times more, or $1200.
To calculate on year's worth of interest at 20% p.a., we multiply the principal
(the beginning balance) times  .
$ at 20% interest for 1 year would earn $ .
At 20% simple interest for 2 years, the second year interest would be calculated as another $, based on the starting $.
The total interest for the 2-year period would be $+$=$ .
If the interest was compounded annually,
the balance at the end of the first year,
$+$=$ ,
would be the new principal, used to calculate the interest on the second year.The interest for the second year would be
$ =$ .
That is an extra $ over what simple interest would yield.
The $ for the second year comes from calculating interest on the interest
already earned the first year.
The $ is second year interest on the first year interest.
That's called compounding the interest.
NOTE:
Interest can also be compounded monthly, daily, or continuously.
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