What is the difference between simple and compound interest?

Simple interest means the amount of money increases by the same amount each year, compound interest means the amount of money increases by the same proportion each year. For example if you deposited £100 in the bank at 3% interest, you would earn £3 on your money each year as 3% of £100 is £3 and you earn the same amount each year. This means that at the end of a 3 year period you would now have £109.

If you take the same example with compound interest, if compound interest is 3% per year, your money increases by 3% each year. It is easiest to explain using the example:

Year 1: 3% of £100= £3, £100+£3=£103     Year 2: 3% of £103=£3.09, £103+£3.09=£106.09    Year 3: 3% of £106.09=£3.1827, £106.09+£3.1827=£109.2727. As the smallest value of english currency is 1p we would round this to 2 decimal places... £109.27

An easy formula for compound interest is: (original amount) × (proportion increase)number of years invested= final amount

eg... 100×1.033=109.2727.

JS
Answered by James S. Maths tutor

12677 Views

See similar Maths GCSE tutors

Related Maths GCSE answers

All answers ▸

Solve the simultaneous equations 2x+3y=17 and 10x-y=5.


solve 125^(1/3)*2^(-3)


There is a right angled triangle, you know the length of the hypotenuse (6) and one other side (3), can you calculate the third side of the triangle?


2(y+3) = 10. What is y?


We're here to help

contact us iconContact ustelephone icon+44 (0) 203 773 6020
Facebook logoInstagram logoLinkedIn logo

MyTutor is part of the IXL family of brands:

© 2025 by IXL Learning