Simple and compound interest

Interest is money paid for saving or borrowing. Simple interest is the same every year. Compound interest is worked out on the new total each year, so it grows faster. Depreciation is a loss of value worked out the same way.

Key facts

  • Simple interest = P × r/100 × n.
  • Compound: A = P(1 + r/100)ⁿ.
  • Depreciation: A = P(1 − r/100)ⁿ.
  • Compound interest earns interest on the interest.

Worked examples

Example 1

£2000 is invested at 3% compound interest for 4 years. Find the final amount.

  1. 3% increase: multiplier 1.03.
  2. Use it 4 times. 2000 × 1.03⁴
  3. = 2251.0162… £2251.02

Answer: £2251.02

Example 2

£2000 at 3% simple interest for 4 years: how much interest?

  1. One year: 3% of 2000 = 60.
  2. 4 years: 60 × 4 = 240.

Answer: £240