Compound Interest

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Year 10 Interactive Maths - Second Edition

Compound Interest

If the interest due on savings is added to the principal at given intervals, then the interest is said to be compounded (or converted) into principal and thereafter also earns interest. Consequently, the principal increases periodically and the interest compounded into the principal increases periodically throughout the term of the transaction.

The sum due at the end of the transaction is called the compound amount and is denoted by A.

The difference between the compound amount and the original principal is called the compound interest and is denoted by CI.

Consider an investment of $P at the percentage r per annum.

First year of investment

Second year of investment

We, often write the formula for the accumulation of principal at compound interest as:

This formula is also applied in problems dealing with population growth. If there is a decrease instead of an increase, then r is negative.

Example 22

Calculate the compound interest on $6000 if it is invested for 3 years at 7.5% per annum.

Solution:

Key Terms

compounded, compound amount, compound interest, compound interest formula

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