GCSE Maths Unit 1 - Compound Interest

November 23, 2015

GCSE Maths – Compound Interest

Compound interest is the process whereby interest is accumulated each year – i.e. after the first year there is interest on the interest, and so on.

The interest is added to the principal, this is called "Compounding". The interest rate remains the same yearly, but the sum of money is larger each year. 

It usually applies to investments, savings and loans. 

The formula is given and explained below. The amount grows as an exponential function each year. 

It differs from simple interest as it is calculated on the principal plus the previous interest, simple interest is only calculated on the principal and is the same for each period. 

To calculate compound interest we use the following formula:

Total amount = P × (1 + i)n

where P = Original amount invested, i = Interest rate (as a decimal), n = number of years 

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