Simple interest

Categories: Bonds, Banking

Simple interest means that interest is calculated only on the principal or initial amount of a loan or investment. Read up on compound interest to understand the difference.

Example

You buy some securities for $1,000, and you make 10% on that investment. After one year, you have $1,100.

If simple interest is being used to calculate your investment, the next year, you will earn another 10% on $1,000, so each year you'll be making $100 on the investment.

If you're dealing with compound interest, in your second year, you'll earn the 10% on $1,100 (the original $1,000 + the $100 you made in interest), so you'll make $110 that year. And so on.

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