Compound interest · Grade 8

In Grade 8 you learn: compound interest.

Compound interest is worked out on the amount in the account each year, including the interest already added, so it grows faster than simple interest. Multiply by the same multiplier every year: A = P(1 + r)ⁿ. Values that fall by a percentage each year (depreciation) work the same way with (1 − r).

Key facts

  • Compound interest: A = P(1 + r)ⁿ.
  • The multiplier for a 4% rise is 1.04; for a 15% fall it is 0.85.
  • Inflation raises prices like compound interest.

Worked examples

Example 1

$2,000 is invested at 5% compound interest per year. Find its value after 2 years.

Answer: $2,205

Example 2

$2,000 is invested at 3% compound interest per year. Find its value after 5 years.

Answer: $2,318.55

Example 3

A house is worth $200,000. Its value rises by 4% each year. What is it worth after 3 years?

Answer: $224,972.80

Example 4

$1,000 is invested for 3 years at 5% per year. How much more is it worth with compound interest than with simple interest?

Answer: $7.63

Other years