The most common form of interest is compound interest.

1
What is Compound Interest?

• The most common form of interest is compound
  interest.
• It is called compound interest because the
  interest accumulated each year is added to the
  principal, and for each subsequent year interest
  is earned on this total of principal and
  interest.
• The interest thus compounds.

2
How do we calculate Compound Interest?

• Suppose we invest 5000 at 10 per annum compound
  interest for 4 years. We can determine the
  growth of the investment as follows

5500
6050
6655
7320.50
3
How do we calculate Compound Interest?
There is a formula we can use to calculate
compound interest without having to work it out
year by year as in the previous table. That is
4
If we graph the amount of the investment (A)
against the time for which the money has been
invested (t) then we can see that the
relationship between these variables is not
linear.
This is an important property of compound
interest. The amount of increase is increasing
each year, so the growth in the investment is non
linear.
5
To compare simple interest with compound interest
we can graph the amount of the investment against
year for both types of interest on the same graph.
It is clear that after the first year, the
compound interest is a better investment, and the
difference between amounts under simple and
compound interest increases with time.
Difference between compound interest and simple
interest after nine years
Difference between compound interest and simple
interest after five years