Loans and investments
Lesson 7 of 9
Simple versus compound interest
Objective. Compare simple and compound growth over several years.
The key idea
Simple interest is a fixed amount each year on the original sum. Compound interest is charged on the running balance, so it accelerates.
Worked example
£1,000 at 5% for 3 years, compounded annually.
- 1Multiplier: 1.05 per year.
- 21000 × 1.05³ = 1000 × 1.157625.
- 3= 1157.63 to the nearest penny.
Answer: £1,157.63
Practice
Each question comes with a picture and a listen button. Try it first, then reveal the answer.
Common mistake. Multiplying the first year's interest by the number of years when it compounds.
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