Study Notes
Simple and compound interest are methods to calculate the interest on investments or loans over time. Simple interest is calculated on the initial principal only, while compound interest is calculated on the principal plus any accumulated interest.
- Simple Interest — Method to calculate the amount of interest charged on a sum at a given rate and for a given period of time. Example: If you deposit $6200 at 6%, what is the interest value you gain at the end of 2.5 years?
- Compound Interest — Interest calculated on both the initial principal and the accumulated interest from previous periods. Example: A teacher wants to invest $30,000 into an account that compounds annually. The interest rate at this bank is 1.8%. How much money will be in the account after 6 years?
- Percentage — A number or ratio expressed as a fraction of 100. Example: Calculate 30% of 470g.
Exam Tips
Key Definitions to Remember
- Simple Interest: Interest calculated only on the initial principal amount.
- Compound Interest: Interest calculated on the initial principal and accumulated interest.
Common Confusions
- Confusing simple interest with compound interest.
- Misunderstanding how interest is compounded over time.
Typical Exam Questions
- How do you calculate simple interest? Use the formula: Simple Interest = Principal × Rate × Time.
- How do you calculate compound interest? Use the formula: Compound Interest = Principal × (1 + Rate)^Time - Principal.
- What is the difference between simple and compound interest? Simple interest is calculated on the principal alone, while compound interest is calculated on the principal and accumulated interest.
What Examiners Usually Test
- Ability to calculate both simple and compound interest.
- Understanding the difference between simple and compound interest.
- Application of percentage calculations in financial contexts.