00:007% annual interest on $100,000 equals $7,000 per year under simple interest, calculated as $100,000 times
00:090.07.
00:11Over multiple years, however, the actual amount depends heavily on whether interest compounds and how often.
00:181. Simple interest, $7,000 flat per year, every year, regardless of time elapsed.
00:25After 5 years, $35,000 total interest, principal untouched.
00:302. Annual compounding, year 1 yields $7,000, balance becomes $107,000, year 2 yields 7% of $107,000
00:41equals $7,490.
00:45By year 5, total balance reaches approximately $140,255, meaning $40,255 in interest.
00:55Noticeably more than simple interest due to interest on interest.
00:583. Monthly compounding.
01:01Using the formula A equals P, 1 plus or slash N, carat, and T, with N equals 12, after one
01:09year,
01:09the balance is about $107,229, slightly higher than annual compounding, $107,000, because interest accrues more frequently.
01:204. Daily compounding.
01:22After one year, roughly $107,250, marginally higher still, though the difference versus monthly compounding is small, a few dollars,
01:32due to diminishing returns from compounding frequency.
01:35The answer changes based on context.
01:37If this is a loan, 7% often compounds monthly or daily, increasing your cost beyond simple math.
01:45If it's a savings slash CD product, compounding frequency, and whether interest is withdrawn or reinvested changes returns.
01:53Time horizon matters most for compound scenarios since the gap between compounding methods widens over years, not months, and taxes
02:01on interest income.
02:02Dependent on jurisdiction, reduced net returns regardless of the method used.
02:08I don't have current 2026 interest rate benchmarks or specific bank products offering exactly 7%.
02:14So treat this as pure arithmetic, not a market recommendation.
02:19Verify actual product terms before acting.
02:21Practical Takeaway.
02:23For a single-year estimate, use $7,000.
02:264. Multi-year projections on loans or investments.
02:29Confirm the compounding frequency, annual, monthly, daily, with the actual contract or account terms, since that detail, not the 7
02:39% rate alone, determines your real cost or return.
02:43Finally, remember that everything we discussed today is for educational purposes only and does not constitute financial advice.
02:50Good luck to everyone, and see you in the next video.
