What is compound interest?
- Compound interest is where interest is paid on the interest from the year (or whatever time frame is being used) before as well as on the original amount
- This is different from simple interest where interest is only paid on the original amount
How do you work with compound interest?
- For COMPOUND changes (can be a decrease as well as an increase):
- Keep multiplying by the decimal equivalent of the percentage you want
- Otherwise do the same as normal:
- Identify “before” & “after” quantities
- FIND percentage we want:
- Increase – ADD percentage to 100
- Decrease – SUBTRACT from 100
- Write down a STATEMENT connecting “before” and “after”:
- “after is a percentage of before”
- Write down the statement as an EQUATION using decimal equivalent
- remember “is” means “=”
- SUBSTITUTE and SOLVE
This method works for any Compound Change – increase or decrease.
Remembering “✕ m ✕ m ✕ m = ✕ m3″ can make life a lot quicker:
It is usually much easier to multiply by decimal equivalent raised to a power than to multiply by the decimal equivalent several times in a row.