Simple interest vs. compounded interest - Posted by MStevens

Posted by Dave T on May 06, 2000 at 18:32:27:

Never said that I used an INTERNET financial calculator, but I will tell you how to figure this out yourself with your financial calculator.

Just enter the following:

PV = -100
i = 0.019/365
PMT = 0
NPER = 365

Now solve for FV. These numbers assume that you deposit \$100 (PV) into a savings account that earns 1.9% annual interest compounded daily (0.019 divided by 365 gives the daily interest rate). At the end of 365 days (NPER), with no additional deposits (PMT = 0) your balance (FV) is \$101.918. Round that off to your initial \$100 deposit plus \$1.92 interest earned over the course of the year. This illustrates that you would need a simple interest rate of 1.92% to achieve the same result as 1.90% compounded daily.

As to the rest of your comment, remember that your banker is evaluated on her productivity – one element that contributes to productivity is the number of loan products sold to consumers. This banker seems to be primarily motivated to sell you a loan product that makes money for the bank, regardless of whether that product is in your best interest (no pun intended).

Simple interest vs. compounded interest - Posted by MStevens

Posted by MStevens on May 06, 2000 at 15:27:43:

Is there a simple formula to compare the two? If I am getting 1.9% compounded daily, what is that equal to in simple interest? Anyone? Thanks…

Simple Interest is 1.92% - Posted by Dave T

Posted by Dave T on May 06, 2000 at 16:18:48:

Don’t know any short cut formula, but in your example, the effective annual yield would be 1.92%.

Banks often quote you the compounding interest rate, then tell you what the effective annual yield is for that rate. In others words, the simple interest rate is the effective annual yield.

Re: Simple interest vs. compounded interest - Posted by Eduardo (OR)

Posted by Eduardo (OR) on May 06, 2000 at 16:03:01:

M–

Simple interest is calculated on a straight line, compound interest is calculated on a curve. They can be compared at any point in time, but without additional data there is no formula to compare the two. You need to give more information. P.S. fully-amortized mortgages are simple interest.

Re: Thank you!that is what I was looking for… - Posted by MStevens

Posted by MStevens on May 06, 2000 at 17:02:26:

Where did you get this Internet, financial calculator?
I float 20-25k in credit card debt at 1.9 - 3.9% (most of it 1.9) my banker said I might want to get an equity loan against my rental properties to pay this off because it was not simple interest. Well as usual she is wrong. The interest I am paying is a business expense ( deductable) I have been doing this for years.
The way I see it is why would I ever pay this off?