Compound interest problems are much easier to solve by using the multiplier method.
For example, a 5% increase on the original balance in a bank would mean there is now 105% in the bank. This is the same as 1.05 as a decimal so this is the multiplier.
Calculate the interest on borrowing £40 for 3 years if the compound interest rate is 5% per year.
This calculation can be made more concise by using powers.
To calculate the money in the bank after 3 years the calculation would be:
This can also be written as:
Using powers saves a lot of steps if the time period for the calculation is large.
£500 is invested in a bank account that receives 3% compound interest per year. How much will be in the bank account after 7 years?
A car depreciates in value by 8% per year. It was bought for £10,000. How much is it worth after 5 years?