If I put £500 in the bank with an annual interest rate of 3% how much money will I have earned in 2 years?
Too calculate this we need to increase to total amount of money in the bank by 3% year on year for 6 years.
Year 0 £500
Year 1 £500 x 1.03 = £515
Year 2 £515 x 1.03 = £530.45
Notice we use the running total and increase that by 3% per year.
This can also be represented as £500 x 1.03 x 1.03 or £500 x 1.03^2.
To work out how much we have earned, it is then a simple matter of subtracting £500 from £530.45 leaving us with £30.45.
You will earn £30.45 in 2 years.
AT
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