discusssion question

Objective: Address the difference between simple and compound interest. Interest is the payment for the use of money, or the excess cash received or repaid over and above the amount lent or else borrowed. The amount of interest to be received or paid is stated as a rate over a specified period of time. Three components of an interest rate are the pure rate of interest, the credit risk rate of interest, and the expected inflation rate of interest. When calculating an interest rate, three variables are used: (1) the loan principal, or the amount that is borrowed or invested, (2) the interest rate, or the percentage of the outstanding loan principal, and (3) the time, or the number of years or fractional period of a year that the loan principal is outstanding. Simple interest is calculated on the amount of the principal only, and is the return on the loan principal for one time period only. On the other hand, compound interest is calculated on the loan principal and on any interest earned to date on the principal that has not been paid or withdrawn. It is the return on the loan principal for two or more time periods. - Read Chapter 5 in your textbook. - Watch Simple vs. Compound interest - Discuss the following: - In your own words, explain the difference between compound and simple interest. - Explain the three components of an interest rate and why is it important that accountants understand these components. - Read Chapter 5 in your textbook. - Watch Simple vs. Compound Interest - Discuss the following: - In your own words, explain the difference between compound and simple interest. - Explain the three components of an interest rate and why is it important that accountants understand these components. - Using the example of a $1,200 investment made today at 6 percent interest, what would be the amount of the investment at the end of 5 years if the interest on this investment is calculated using compound interest and also if the interest is calculated on this investment using simple interest. - Explain the reason for the difference in the two methods