Lecture notes Business mathematics (BMD115D)

CHAPTER 13: COMPOUND INTEREST
13.1 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.