Compounding Interest and the Banker

My bank would apply a quarterly compounding factor in my savings account. With a compounding interest, the bank will pay a person interest not only on his original deposit but also on the interest his deposit has earned over time (Ryan & Ryan, 2015). Moreover, a compound interest is good because you expect your money to grow more at a faster rate. For instance, if my account had $600 and at the end of the quarter it had earned an interest of $10, in the following quarter I should expect my account to earn interest on $610 as opposed to the original deposit of $600.

Regarding the account that I am borrowing money from the same bank, the account would accrue simple interest. With simple interest, a person earns interest on the principal amount deposited (Ryan & Ryan, 2015). For instance, if I were to borrow $8000 at 5% interest rate, the account would accrue a simple interest on the $8000 that I originally borrowed.



Ryan, J. S., & Ryan, C. (2015). Managing your personal finances. Cengage Learning.

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