The Student Room Group

Maths interest problem

You have a choice of two saving schemes. One pays 4% simple interest annually, and one pays 4%compoundinterest annually. You invest £3,500 for 3 years. By showing all your working, explain which type of interest will give you the best return for your money.

Scroll to see replies

Do you know the difference between simple and compound interest?
Original post by Sabrinatariq99
You have a choice of two saving schemes. One pays 4% simple interest annually, and one pays 4%compoundinterest annually. You invest £3,500 for 3 years. By showing all your working, explain which type of interest will give you the best return for your money.


What have you got so far?
Reply 3
Original post by laurawatt
What have you got so far?


Nothing, since I don't have any type of interest in my country, I do not know how to work it out. I am also homeschooled, and can't find any good explanation online between the differences between compound and simple interest.
Original post by Sabrinatariq99
Nothing, since I don't have any type of interest in my country, I do not know how to work it out. I am also homeschooled, and can't find any good explanation online between the differences between compound and simple interest.


Here are the notes I made in my maths book for interest - hopfully this helps?
image.jpg
Reply 5
Original post by laurawatt
Here are the notes I made in my maths book for interest - hopfully this helps?
image.jpg


Thank you, this was kind of helpful. it also taught me about how to work out that kind of question. Nice handwriting!
Original post by Sabrinatariq99
Thank you, this was kind of helpful. it also taught me about how to work out that kind of question. Nice handwriting!


Awesome :gah:
Do you have the answer to your original question then?
Reply 7
Original post by laurawatt
Awesome :gah:
Do you have the answer to your original question then?

no, not yet.:frown:
Original post by Sabrinatariq99
no, not yet.:frown:


In my worked example, try substituting your numbers in. The questions are pretty similar anyway :smile:
Work out the simple interest, them the compound interest and then see which gives you more money
Reply 10
Original post by laurawatt
Work out the simple interest, them the compound interest and then see which gives you more money

ok, thanks it worked:biggrin::tongue:
Reply 11
so for simple interest:
Interest = Initial amount x Rate/100 x Length of time
£3500 x 0.04 x 3 = 420
so Total amount after interest = £3920

compound interest:
Total amount after interest = Initial Amount (1 + Rate/100)^Length of time
£3500 (1.04)^3 = £3937.02

Hence, compound interest will give you the best return for your money.
Reply 12
Original post by Sabrinatariq99
ok, thanks it worked:biggrin::tongue:

However, will the higher or lower amount of money give me the best return for money?
Original post by Sabrinatariq99
However, will the higher or lower amount of money give me the best return for money?


"Best return for your money" = Higher amount, since getting more money is considered to be better under a capitalist system.
Reply 14
Original post by Prasiortle
"Best return for your money" = Higher amount, since getting more money is considered to be better under a capitalist system.


ok thanks:tongue:
Anyone know how to do this:
Sam wants to buy a motorbike that costs £5,000. He can pay the entire amount now or choose a payment plan that consists of paying £2,000 now and £3,500 after 1 year. What is the implied yearly interest rate for the payment plan?
Original post by Jackbob4684
Anyone know how to do this:
Sam wants to buy a motorbike that costs £5,000. He can pay the entire amount now or choose a payment plan that consists of paying £2,000 now and £3,500 after 1 year. What is the implied yearly interest rate for the payment plan?

yep, so the initial price of the motorbike is £5,000. over the payment plan, he will pay a total of 2,000+3,500 =£5,500. Obviously, they aren't the same, and the difference is interest paid over the year. £5,500 - £5,000 is £500. Find 500 as a percentage of the initial price (£5000) and you have your yearly interest rate.

hope this helped x
Original post by fineapple100
yep, so the initial price of the motorbike is £5,000. over the payment plan, he will pay a total of 2,000+3,500 =£5,500. Obviously, they aren't the same, and the difference is interest paid over the year. £5,500 - £5,000 is £500. Find 500 as a percentage of the initial price (£5000) and you have your yearly interest rate.

hope this helped x

I don’t think this is right, as you would not normally expect to pay interest on the amount paid up-front, £2,000 in this case. So the situation boils down to the payment of £500 interest on a loan of £3,000 for one year.
Original post by fineapple100
yep, so the initial price of the motorbike is £5,000. over the payment plan, he will pay a total of 2,000+3,500 =£5,500. Obviously, they aren't the same, and the difference is interest paid over the year. £5,500 - £5,000 is £500. Find 500 as a percentage of the initial price (£5000) and you have your yearly interest rate.

hope this helped x

Thanks for the help but do you know how to find the monthly interest rate?
Original post by old_engineer
I don’t think this is right, as you would not normally expect to pay interest on the amount paid up-front, £2,000 in this case. So the situation boils down to the payment of £500 interest on a loan of £3,000 for one year.

Thanks for the help but do you know how to find the monthly interest rate?

Quick Reply

Latest