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CHAPTER 8
Simple interest:
• Annual interest rate of 3% means that 3% interest of $10,000 will be received for the
first year or $300.
• Since the principal sum remains the same, the interest for the second year would
also be: $10,000 × 0.03 (3%) = $300.
• Thus, the total interest after a period of three years would be $900, as indicated
below.
$10,000 (principal sum) × 0.03 (interest) × 3 (number of years deposited) = $900
Compound interest:
• The interest for the first year would be $300 ($10,000 × 0.03), which is the same as
for simple interest.
• The interest for the second year is calculated by adding the interest gained in the
first year to the principal sum. Thus, interest of $309 (($10,000 + $300) × 0.03)
would be received.
• The interest for the third year is calculated by adding the interest gained in the
second year, which is $318.27 as indicated below.
($10,300 + $309) × 0.03 = $318.27
• Thus, the total interest received in the period of three years would be $927.27 ($300
+ $309 + $318.27)
• As can be seen in the above example, there is a difference of $27.27 ($927.27 –
$900) after three years for simple interest and compound interest, although the
interest rate is the same.
• For compound interest, the amount in the bank is increased by receiving interest on
the interest gained during each calculated period.
EL-9650-(08)EN (197-210) 8/1/00, 9:09 AM198
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