If the simple interest in year 1 is $7 on a $100 principal with a 7% interest rate, what is the compounded interest for year 2?

Question

mathstudent55 · Answer

Compound interest means earning interest on the total principal and interest you already have.

mudslinger · Answer

ok

mathstudent55 · Answer

Start with $100.
Earn 7% simple interest for 1 year.
7% of $100 is $7.
At the end of the first year now you have $107 total.

If you do simple interest again for the second year, you'd earn interest only on the $100, so you'd earn another $7 in the second year.

If instead you now earn compound interest for the second year, that means you will earn interest on the total $107 you have at the end of the first year.

mathstudent55 · Answer

The compounded interest for year 2 is 7% of $107.

mudslinger · Answer

so i would multiply 107 by 2