Compound interest adds interest to the total each year, so you earn interest on interest. Use a multiplier: 3% growth is × 1.03. After n years, value = start × 1.03ⁿ. $4600 at 3% for 4 years is 4600 × 1.03⁴ = $5177.34.
Depreciation is a loss in value each year. 8% depreciation is a multiplier of 0.92. A $200 item after 2 years is worth 200 × 0.92² = $169.28. Simple interest, by contrast, only uses the starting amount.
Worked example
$300 is invested at 10% compound interest per year. How much is it worth after 2 years?
- Multiplier 1.10 for each year.
- 300 × 1.10² = 300 × 1.21 = 363.
Answer:$363.00
Key words
- compound interest
- interest added to the total each year
- depreciation
- loss of value over time
- multiplier
- the number you multiply by for a percentage change
Practise this
New questions every time.
Common Core-referenced: HSF-LE.A.1c