Compound Interest Flashcards

All 4 cards in this deck

What is compound interest?

Interest added to the balance each year, so the next year's interest is worked out on the new, larger amount.

What are the steps to work out the compound interest earned, as an amount and as a percentage of the original sum?

e.g. £4000 at 3% per annum for 2 years

1. Find the value: $4000 \times 1.03^2 = 4243.60$
2. Subtract the original: $4243.60 - 4000 = £243.60$
3. As a percentage: $243.60 \div 4000 \times 100 = 6.09\%$

How do you find the annual percentage rate when you know the starting value, the final value and the number of years $n$?

e.g. £250 000 grows to £325 000 in 6 years

Take the $n$th root of (final $\div$ start), then subtract 1: $\sqrt[6]{325000 \div 250000} = 1.0447\ldots$, so $x = 4.5\%$ (2 s.f.)

True or false? An account paying compound interest of 2.4% for the first year and 1.8% for each extra year gives a value after 3 years of $P \times 1.024 \times 1.018^2$.

True. Multiply the starting amount by each year's multiplier in turn.