Ever wondered how savings can grow faster every year?
Bola puts ₦100,000 in a savings account paying 10% per annum. With compound interest, the interest she earns this year starts earning interest too — so her money grows a little faster each year.
Revision notes
See how interest earns interest, and use one formula to find amounts and interest quickly.
Bola puts ₦100,000 in a savings account paying 10% per annum. With compound interest, the interest she earns this year starts earning interest too — so her money grows a little faster each year.
With simple interest, you earn the same amount every year, worked out on the original money only.
With compound interest, each year's interest is added on, and next year's interest is worked out on the new total.
₦100,000 at 10%: year 1 → ₦110,000; year 2: 10% of ₦110,000 = ₦11,000, giving ₦121,000. Simple interest would give only ₦120,000.
🔑 Key idea: Compound interest is worked out on the new total each year.
Adding 10% is the same as multiplying by 1.10. Doing it for n years means multiplying n times, so A = P(1 + r/100)n.
Here P is the principal, r the rate per annum and n the number of years: ₦100,000 × 1.12 = ₦121,000.
The interest is the amount minus the principal: ₦121,000 − ₦100,000 = ₦21,000.
🔑 Key idea: A = P(1 + r/100)n; interest = A − P.
Find the yearly multiplier first: 5% → 1.05, 8% → 1.08, 12% → 1.12.
Read the question: does it want the amount (A) or the interest (A − P)?
The number of years is a power, not something to multiply by.
🔑 Key idea: Multiplier, power, then check: amount or interest?
Emeka saves ₦50,000 in a bank that pays 5% compound interest per annum. Find the amount after 2 years.
Step 1: Year 1
₦50,000 + 5% of ₦50,000 = ₦50,000 + ₦2,500 = ₦52,500
Why? Each year's interest is added on, and next year's interest is worked out on the NEW total.
Step 2: Year 2
₦52,500 + 5% of ₦52,500 = ₦52,500 + ₦2,625 = ₦55,125
Step 3: Formula check
A = ₦50,000 × (1 + 5100)2 = ₦55,125
Answer: ₦55,125
Ready to check you've got it? Scroll up and work through the lesson: the interactive visuals, practice questions and mastery check are all there.