Final answer:
Compound interest is generally more beneficial for investments as it is calculated on both the principal and the accumulated interest, resulting in faster growth over time. Simple interest is only calculated on the principal amount, making it less lucrative over the long term. With compound interest, investments grow exponentially, especially with larger sums and longer durations.
Step-by-step explanation:
Simple vs Compound Interest
When considering the benefits of simple interest and compound interest on an investment, it's crucial to understand the difference between the two. Simple interest is calculated only on the principal amount of the investment. The formula for simple interest is I = Prt, where 'I' is the interest earned, 'P' is the principal amount, 'r' is the interest rate, and 't' is the time in years.
Compound interest, on the other hand, is calculated on the principal and also on the accumulated interest of previous periods. This means that interest is earned on interest, causing the investment to grow at a faster rate compared to simple interest. Over time, compound interest can significantly increase the value of an investment, especially with larger sums and over longer periods. For example, with a principal of $100 at a 5% interest rate over three years, compound interest will yield more than simple interest, as illustrated by a total of $115.76 with compound interest versus $115 with simple interest.
Generally, compound interest is more beneficial for long-term investments as it accelerates the growth of the investment's value over time. While the initial difference may seem small, the impact of compound interest becomes more significant the longer the investment is held and the larger the initial sum.