Question 889702: Bob deposits into an account that pays simple interest at a rate of per year. How much interest will he be paid in the first years?
Answer by JulietG(1812)   (Show Source):
You can put this solution on YOUR website! Note: when you copy and paste from a program where there is a variable, you need to manually enter the variable.
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Let's say that Bob is depositing $2,000 into an account that pays 8% interest compounded annually. How much will he have after 5 years? (You can adjust the numbers; this is the process.)
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After the first year, Bob has 2000 * 1.08 = 2160
After the second, 2160 * 1.08 = 2232.80
Third, 2232.80 * 1.08 = 2519.42
Fourth, 2519.42 * 1.08 = 2720.97
Finally, after the fifth year, 2720.97 * 1.08 = 2938.65
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You'll notice that it's not simply 8% * 5 years. That's because Bob is earning interest on the interest. The same concept applies with credit cards and student loans, only in reverse -- it's how people get deeply in debt.
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