nikiklsxoxo
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compound and simple interest
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xenobiologist
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Do you have a question?
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nikiklsxoxo
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(Original post by xenobiologist)
Do you have a question?
No, I just needed explanation on how to solve the problems involving compound and simple interest.
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Rarest
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Simple interest is basically the same amount of interest every year.
So for example we have £1000 with a simple interest rate of 5% and we leave it in there for 3 years.

5% of £1000 is £50 so we get £50 every year. so 50 * 3 = 150 and we would have £1150 at the end of 3 years.


Now, if we have £1000 with a COMPOUND interest rate of 5% and we leave it in there for 3 years :

5% of £1000 is £50 so for the first year we get £50, so now we have £1050 in the bank, for compund interest instead of adding £50 each each like we did before, we work out 5% of the new value so 5% of £1050 is £52.5 so after the second year we have 1050+52.5 = 1102.5 and for our final year we work out the 5% of 1102.5 and add it on.

Now that is the long way of working out compound interest problems, what happens if we are asked to find the 50th years value? Sure, we can probable spend 50/60mins in the exam trying to figure it out and mess up halfway through without realizing but there is an easier way.

Firstly convert 5% into a multiplier (5% is 1.05, 10% is 1.1, 25% is 1.25 etc you get the idea)
Then get your base value which is £1000 in our case, and then multiply it by the multiplier to the power of how many years you want it to:

heres an example because im bad at explaining ; £1000 x 1.05^50

£1000 is our base value, 1.05 is our 5% multiplier and ^50 is 1.05 to the power 50 because we want 50 years.
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