Real-life application: Person A invests in a 2-year bond that pays 4% annual simple interest (paid semi-annually). Person A pays $1,000 for the bond and receives $20 (4% x $1,000 / 2) every 6 months.
The $20 payments are not being reinvested in the bond, so they do not accrue interest themselves.
Person B invests in a 2-year bond that pays 4% annual interest (interest reinvests semi-annually). Person B pays $1,000 for the bond and the bond grows by 2% (4% / 2) every 6 months. The interest with this bond is not paid out, but instead compounds.
| Period | Simple Interest Bond (A) | Compound Interest Bond (B) |
| Month 0 | -$1,000 | -$1,000 |
| Month 6 | $20 | $0 |
| Month 12 | $20 | $0 |
| Month 18 | $20 | $0 |
| Month 24 | $1,020 | $1,082.43 |
| Net Income (%) | $80 (8%) | $82.43 (8.24%) |
