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Lecture notes Business mathematics (BMD115D)
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Notes and in depth explanation of how to deal with COMPOUND INTEREST
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CHAPTER 13: COMPOUND INTEREST13.1 INTRODUCTION
Compound interest is calculated on the value of the investment (principal plus
interest) at the time the interest is charged or earned.
Accumulated value = original principal plus interest.
Compound interest = difference between accumulated value and original principal.
13.2 DIFFERENCE BETWEEN SIMPLE INTEREST AND COMPOUND INTEREST
• Simple Interest
The interest earned each period is a constant amount based on original
principal.
• Compound Interest
The interest earned is a different amount each period based on the
accumulation of principal and interest at the time the interest is calculated
Formulae for Compound Interest
• Accumulated value
𝑆 = 𝑃(1 + 𝑖)𝑛 key formula
• Present value or principal
𝑆
𝑃= (1+𝑖)𝑛
𝑜𝑟 𝑃 = 𝑆(1 + 𝑖)−𝑛 key formula
• Calculation of compound interest
I=S-P
Where:
o P = Principal or present value
o i = interest rate
o n = number of compounding periods
o I = total compound interest
o S = Future Value
For compound interest calculations, always remember to adjust i and n.
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