Simple interest and compound interest

To better understand the comparison between simple and compound interest, observe that for simple interest the balance is growing by the same amount each year. This means that the balance for simple interest is showing linear growth. For compound interest, the balance is growing by the same percent each year. This means that the balance for compound interest is growing exponentially.
Try changing the Annual rate on the graph below. Notice how the two graphs behave. By using the Time slider you can follow the widening gap between the two graphs, which shows the power of compounding.

Annual rate

47

Type of Compounding

  •   annual
  •   semiannual
  •   quarterly
  •   monthly
  •   daily

Time

13

Gap: $

Simple Interest    vs    Compound Interest

End of Year Simple Interest Compound Interest
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Questions

1. If the annual rate is 15% and compounded monthly, when is the gap between the simple and compound interest amounts greater than $200?
2. Is the compound interest graph (compounded annually) always greater than or equal to the simple interest graph?
3. What is the greatest dollar amount gap that you can create between the two graphs? What conditions produce this greatest gap?