1. The calculation formula of simple interest is: sum of principal and interest = principal ×( 1+ simple interest rate× number of periods). In this formula, the principal is the initial investment, the simple interest is the interest rate calculated only for the principal, and the number of periods is the length of the investment. The characteristic of simple interest calculation is that the interest earned in each period is fixed, and the interest earned in each period does not participate in the interest calculation in the next period.
2. The formula of compound interest is: sum of principal and interest = principal ×( 1+ compound interest) periods. In this formula, the principal is also the initial investment amount, compound interest is the interest rate calculated by the sum of the principal and the interest of previous periods, and the number of periods is the length of investment. The characteristic of compound interest calculation is that the interest earned in each period will accumulate over time, so the principal and interest of compound interest will be higher than that of simple interest.
Application of simple interest and compound interest in financial field;
1. deposit and loan: banks usually use simple interest or compound interest to calculate deposit and loan interest. For time deposits, banks usually calculate interest according to simple interest, while for long-term loans, banks may calculate interest according to compound interest.
2. Insurance: Insurance companies usually use compound interest when calculating the cash value of insurance policies. This means that with the passage of time, the cash value of the policy will continue to increase, especially when buying life insurance, this compound interest effect is more obvious.
3. Investment: When investors choose investment products, they can compare different investment products with simple interest and compound interest. For example, some investment products may provide higher compound interest, thus generating higher returns in the long run.
4. Bonds: Interest payment of bonds is usually calculated according to simple interest. However, some bonds may use compound interest to calculate interest, especially complex investment products such as high-yield bonds or convertible bonds.
5. stocks: the income from stock investment usually comes from dividends and stock price increases. Dividends are usually calculated according to simple profit, and the rise of stock price may be affected by many factors, including company performance, industry trends, market sentiment and so on.
6. Futures and options: Derivatives such as futures and options usually involve complex interest calculation. In these cases, investors need to carefully study the terms of the contract and consider whether to use simple interest or compound interest to calculate profits and losses.