BestMaths Online :: Compounding Interest

Compounding Interest

Compound interest is calculated over a period of time and the interest is added to the old amount to get the new balance.

The table below shows how it works:

$500 is invested for 3 years at 5% per annum compound interest.

Amount invested ($)	Period	Interest Rate (% per year)	Interest for year ($)	New balance ($)
500	1	5	25	525
525	2	5	26.25	551.25
551.25	3	5	27.56	578.81

The percentage increase for the three year period is[(578.81 − 500)/500 ] × 100 = 15.76%

Try these:
1. Investigate what would happen above if the interest was calculated every 6 months. Comment on this result.
2. Investigate what would happen above if the interest was calculated every 3 months. Comment on this result.
3. Without doing any calculations what would happen if the interest was calculated every month?

	Clue
	Answer

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