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INTEREST: COMPOUND AND SIMPLE

Simple Interest is the interest earned on an investment, in total, after each investment period, without putting the interest earned into the existing account. In other words, if you invest $100 in an account that pays 5% interest annually, the simple interest at the end of five years would be $25. Simple Interest is used on the assumption that one is not reinvesting their interest in the same account. That would be compound interest.

Compound is the interest calculated for a given account over a number of years, with interest being paid on the interest. I know that this may seem confusing, but we'll try and explain the best that we can. Now, let's assume you start out with an account that has $100 in it and the interest is compound and is calculated anually at a rate of 5%. This means that the first year you will recieve 5% of $100 in interest, and the next year you will recieve 5% of $105 in interest. After a bit of practice, its easy; so just do a few problems in your book and you'll get the hang of it. We have below the formulae for simple and compound interest.

Another method of determining interest is financial tables, as shown below.

Financial tables are charts which are used to save calculation.

For instance, if you wanted to determine the amount of interest generated by $1000 at a rate of 3% over 6 months, you would simply locate the point on the financial table where the rate of 3% and 6 months intersect, $1015.09.

Financial tables are used for everything ranging from interest to loan repayments to inflation.

Above table copied from the IB Mathematical Studies book, in the financial math section.