compound interest

This is interest calculated on the total amount – the original amount that is borrowed and the interest which is added to it.

It is different from simple interest, which is calculated on the original amount only.

Compound interest is usually calculated once a year, or sometimes more than once a year.

Let’s use the following example.

A leading bank is offering 6% compound interest on a sum of money invested over a period of 3 years.

Dewi has won £2000 on a lottery ticket and he decides to invest the money. We can use this information to calculate what this investment will be worth at the end of the 3 years.

At the end of year 1, the investment will be worth £2000 × 1.06 = £2120

At the end of year 2, the investment will be worth £2120 × 1.06 = £2247.20

At the end of year 3, the investment will be worth £2247.20 × 1.06 = £2382.03

Therefore, the compound interest that Dewi will receive is the final amount – original amount, which is £2382.03 – £2000 = £382.03.