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© T Madas. £10000 are invested in a building society account. The account pays an annual interest of 8%. Calculate the amount in this account in 6 years.

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Presentation on theme: "© T Madas. £10000 are invested in a building society account. The account pays an annual interest of 8%. Calculate the amount in this account in 6 years."— Presentation transcript:

1 © T Madas

2 £10000 are invested in a building society account. The account pays an annual interest of 8%. Calculate the amount in this account in 6 years time, if no money is further paid in or withdrawn. This problem would be easy if banks/building societies paid SIMPLE INTEREST: I.e. 8% on the original amount for every year Then: 8% of £ x £800 £ £4800 Is this what usually happens? = £800 = £4800 = £14800

3 © T Madas End of YearInterest CalculationStart of YearYear x x x x x x This is what usually happens

4 © T Madas This is known as the compound interest calculation, when at the end of a given period, say a year, the “capital” and interest is reinvested in a repetitive fashion for a number of years.

5 Can you spot an easier calculation? £10000 are invested in a building society account. The account pays an annual interest of 8%. Calculate the amount in this account in 6 years time, if no money is further paid in or withdrawn.

6 © T Madas Can you spot an easier calculation? Original amount Interest increase as a % multiplier years £10000 are invested in a building society account. The account pays an annual interest of 8%. Calculate the amount in this account in 6 years time, if no money is further paid in or withdrawn x 1.08 ( ) ( ) ( ) ( ) ( ) = 10000x 1.08 = 10000x (1.08) 6

7 © T Madas Can you spot an easier calculation? £10000 are invested in a building society account. The account pays an annual interest of 8%. Calculate the amount in this account in 6 years time, if no money is further paid in or withdrawn x 1.08 ( ) ( ) ( ) ( ) ( ) = 10000x 1.08 = remember the order of operations x = = 10000x (1.08) 6

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9 ( ) 7 £1000 were invested at a compound interest rate of 5% per annum. Calculate the value of this investment in 7 years, 15 years and 25 years time. In 7 years: 1000x 1.05= ( ) 15 In 15 years: 1000x 1.05= ( ) 25 In 25 years: 1000x 1.05=

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11 How much more does £1000 invested at 10% compound interest for 10 years gain than £1000 invested at 10% simple interest? Simple interest: 10% of 1000 is £ years earning £100 per year gains £1000 The investment doubles to £2000 Compound interest: ( ) x 1.1 = an extra £593.74

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13 How many years will it take £100 to double in value when invested at: 1. 5% simple interest 2. 5% compound interest Simple interest: 5% of 100 is £5 Every year £5 is earned For the investment to double another £100 must be gained 100 ÷ 5 = 20 years

14 © T Madas Compound interest: In order for the £100 to double the investment must be worth £200 in n number of years ( ) n 100 x 1.05 = 200 This is an equation which requires logarithms to solve We are going to use trial and improvement How many years will it take £100 to double in value when invested at: 1. 5% simple interest 2. 5% compound interest

15 © T Madas ( ) x 1.05= n = 10 ( ) x 1.05= n = 15 ( ) x 1.05= n = 14 Is the correct answer 14 or 15 years? In order for the £100 to double the investment must be worth £200 in n number of years ( ) n 100 x 1.05 = 200 How many years will it take £100 to double in value when invested at: 1. 5% simple interest 2. 5% compound interest Compound interest:

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