Financial Mathematics · SS 3
Compound interest
Find savings when interest is added each year and then earns interest too.
- A = P(1 + r100)n
- Compound interest = A − P
What the letters mean
- A
- the final amount
- P
- the principal
- r
- the rate per cent per year
- n
- the number of years
Worked example
₦100,000 is saved at 10% compound interest per year. Find the amount after 2 years.
Step 1: Put in the formula
A = 100,000 × (1.1)2
Step 2: Work it out
= 100,000 × 1.21 = ₦121,000
Final answer: ₦121,000
See it
Play with this picture from the Compound Interest lesson.
Simple interestPrincipalSame as simpleInterest on interest
Principal P₦100,000
Rate r10%
Years n2
A = ₦100,000 × 1.12 = ₦121,000
Year 2: ₦110,000 + ₦11,000 (10% of last year's total, not of ₦100,000)
Interest = A − P = ₦21,000 · simple interest would give only ₦20,000
Multiplier 1 + 10/100 = 1.1 · amounts rounded to the nearest kobo