Final answer:
To calculate simple interest, use the formula: Interest = Principal × rate × time. For compound interest, the formula is: Future Value = Principal x (1 + interest rate)time, and compound interest is the future value minus the principal.
Step-by-step explanation:
Simple and Compound Interest Calculations
To calculate simple interest, use the formula: Interest = Principal × rate × time. For example, to find the interest on a principal of $10,000 at a rate of 1% over 5 years, the calculation would be $500 = $10,000 × 0.01 × 5. This confirms the rate as correct, being 1%. The total future amount with simple interest is the sum of the principal and the interest earned.
For compound interest, the total future value is calculated by the formula: Future Value = Principal x (1 + interest rate)time. Compound interest is then the difference between this future value and the principal. For a $1,000 investment at 2% interest compounded annually over 5 years, the future value would be $1,104.08, calculated as $1,000(1+0.02)5.