Question

How are interest rates calculated by financial institutions?

Financial institutions generally calculate interest as (1) ______ interest or (2)_______interest.

Answer 1

(1)Simple

(2) Compounded

Step-by-step explanation:

The simple interests are interests rates that are charged to whoever ask for the loan, or borrows money in credit cards for the simple action of taking the money, and that percentage is charged one or several times, but does not become part of the debt.

Compounded interests are interests that as the simple are charged to the person that borrows the money or takes out a credit, but this interests do become part of the debt and eventually start to generate interests as the principal account.

Answer 2

Generally, financial institutions would calculate interest using two models: simple interest and compound interest.

Simple interest refers to calculating interest only on the loan amount you are given or the deposit amount you make, while compound interest refers to calculating interest based on the loan amount you are given or the deposit amount you make as well as the interest it accumulates in every period.