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The Difference Between Compound and Simple Interest Calculations

Compound interest and simple interest are two methods used to calculate interest on a principal amount over a period of time.

• Simple Interest: Simple interest is calculated only on the principal amount. The interest remains constant throughout the period.
• Compound Interest: Compound interest is calculated on the initial principal amount and also on the accumulated interest from previous periods. The interest amount increases over time as it is added to the principal amount.

The key difference lies in how the interest is calculated and how it accumulates over time, leading to different total amounts paid or earned in the end.

Understanding the difference between compound and simple interest calculations is essential in making informed financial decisions and maximizing returns on investments.

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