Compound Interest is a percentage of money that is added to/ or taken away from an initial figure over a period of time.

Sometimes you love it

Sometimes you hate it.

For compound interest calculations, the interest earned in each period is added to the initial figure

So compound interest for any year is interest paid on the total sum of money invested and the interest earned the previous year.

Find the compound interest when £400 is invested for 3 years at an interest rate of 8%.

Interest for year 1 £400 x 0.08 = £32

Total for year 1 £400 + £32 = £432

Interest for year 2 £432 x 0.08 = £34.56

Total for year 2 £432 + £34.56 = £466.36

Interest for year 3 £466.36 x 0.08 = £37.31

Total for year 3 £466.36 + £37.31 =£503.67

Not a bad profit. What are you going to spend it on?

Compound interest calculations are also used to find the depreciation of something.

You bought a speed boat that cost £18,000. Each year the price decreased in value by 5% at the beginning of each year.

Calculate the cost of the speed boat in 3 years time.

Year 1 £18,000 x 0.05 = 900

£18,000 - 900 = £17,100

Year 2 £17,100 x 0.05 = £855

£17,100 - £855 = £16,254

Year 3 £16,254 x 0.05 = £812.25

£16,254 - £812.25 = £15,441.75

Not your wisest decision to buy that boat was it?

Eagle eyes - Look out for an added extra throughout the activities.