Mathematics Final Exam. Comparing and Contrasting Explaining the Simple and Compound Interest

Mathematics Final Exam 
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Mathematics Final Exam 
Lenders use either simple or compound interests to charge their interest on the loan. Simple interest is usually computed based exclusively on the principal or the amount of money loaned. On the other hand, compound interest is calculated based on both the principal amount of money borrowed plus the interest accumulated during that period. The lender usually gains a higher return from both simple and compound interests whenever the frequency of compounding is high. This paper seeks to compare and contrast simple and compound interests and state the ethical issues that surround interest rates.
Comparing and Contrasting Explaining the Simple and Compound Interest
Firstly, simple interest is the interest charged solely on the principal amount of the money borrowed for the entire loan term. It is usually computed using the following formula:
Simple Interest = P×r×n
Where: P=Principal amount
r= interest rate per year
n=Term of loan, in years.
On the other hand, compound interest is the interest rate that is calculated both the principal amount on loan as well as the interest rate earned during the entire loan term (Surbhi, 2018). It is usually calculated using the following formula:
Compound Interest = P×(1+r)t −P
Where: P=Principal amount
r= interest rate per year
t=term of the loan per year the interest is applied​
Secondly, simple interest generates a relatively lower return compared to compound interest because the latter is calculated based on both the principal and the interest rate accumulated during the entire loan term (Surbhi, 2018). Thirdly, while the principal amoun...