Compound interest question Watch

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Tom
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£50,000 over 25 months @ a compound interest rate of 0.7535% per month.

Do I simply work what 0.75% is of £50,000 then multiply by 25?

How does compound interest work?
Weller
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"Tom" <[email protected]> wrote in message news:[email protected]...
[q1]> £50,000 over 25 months @ a compound interest rate of 0.7535% per month.[/q1]
[q1]>[/q1]
[q1]> Do I simply work what 0.75% is of £50,000 then multiply by 25?[/q1]

No thats simple interest You need

50 000 * (1.0075)^25

[q1]> How does compound interest work?[/q1]

Interest on the total amount in the account at the end of each month is paid into the account
monthly max
Steve.Wren
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[q1]> £50,000 over 25 months @ a compound interest rate of 0.7535% per month. Do I simply work what[/q1]
[q1]> 0.75% is of £50,000 then multiply by 25?[/q1]

No - thankfully if you are in credit at the bank, unfortunately if not!

[q1]> How does compound interest work?[/q1]

It's probably easiest to see using an example with easy numbers.

Consider you have £1000 in the bank at an interest rate of 10%.

In the first month you earn 10% of £1000 (ie. £100) in interest. At the end of the 1st month you
therefore have £1100

In the second month you earn 10% of the full £1100 in interest (ie. £110) At the end of the 2nd
month you have therefore got £1210

In the third month you earn 10% of the full £1210 in interest (ie. £121) At the end of this 3rd
month you have a total of £1331.

Compare this to the "simple interest" method which you suggested - after three months of 10% simple
interest you would have £1300.

Hence you are happier if you are in credit (you are £31 better off) but sad if you are owing money!

I set my students a task on Excel last week - if you put £10 in the bank on your birthday every year
from your 1st birthday until you were 50 at an interest rate of 5% how much money would you have
when you get to 50?

made them guess first! They were amazed - of course some wag pointed out that prices will have gone
up lots due to inflation by then and thus he led me straight into the extension of predicting the
price of a can of coke by that same time!

They enjoyed it - and got some chance to use excel as a tool for their maths!

Steve
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