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Cambridge O Level Maths Your notes

Simple & Compound Interest, Growth & Decay

Contents
Simple Interest
Compound Interest
Exponential Growth & Decay

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Simple Interest
Your notes

Simple Interest
What is simple interest?
Interest is extra money added every year (or month) to an original
amount of money Simple interest is interest that is the same amount
each time
It can be good: for example, putting £100 into a bank account and the bank
rewarding you with simple interest of 10% every year
After one year you’d have £110, after two years you’d have
£120, … It can be bad: for example, owing £100 to a friend and they charge you
simple interest of 10% for every year you don’t pay them back
After the rst year you’d owe them £110, after the second year you’d owe
them £120, … If £P is your initial amount of money and simple interest is added to it at
a rate of R% per year for T years, then the total amount of interest gained, £I, is given
by the formula
PRT
I=
100
Remember that this formula calculates the amount of simple interest added over T
years, not the total amount of money after T years
To nd the total amount of money after T years, add the interest £I to the original amount £P

Exam Tip

Exam questions will state “simple interest” clearly in the question, to avoid confusion with compound interest
Pay attention to how some questions want the nal answers (for example, to the nearest hundred)

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Worked example
Your notes
A bank account o ers simple interest of 8% per year. I put £250 into this bank account for 6 years. Find

the amount of interest added over 6 years,

the total amount in my bank account after 6 years.

(a) Substitute P = 250, R = 8 and T = 6 into the formula to nd the simple interest, I

The amount of interest over 6 years is £120

(b) The total amount after 6 years is the original amount, £250, plus the interest from part (a), £120

250 + 120

The total amount in my bank account after 6 years is £370

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Compound Interest
Your notes

Compound Interest
What is compound interest?
Compound interest is where interest is paid on the interest from the previous year
(or whatever time frame is being used), as well as on the original amount
This is di erent from simple interest where interest is only paid on the original amount
Simple interest goes up by the same amount each time whereas compound interest
goes up by an increasing amount each time

How do you work with compound interest?

Keep multiplying by the decimal equivalent of the percentage you want (the
multiplier, p) A 25% increase (p = 1 + 0.25) each year for 3 years is the same as
multiplying by 1.25 × 1.25 × 1.25
Using powers, this is the same as × 1.253
In general, the multiplier p applied n times gives an overall
multiplier of pn If the percentages change varies from year to year,
multiply by each one in order
a 5% increase one year followed by a 45% increase the next year is
1.05 × 1.45 In general, the multiplier p1 followed by the multiplier p2 followed by
the multiplier p3... etc gives an
overall multiplier of p1p2p3...
⎜⎛ r ⎞⎟ n
⎜Alternative
1+ ⎟ method: A formula for the nal ("after") amount is P where...
100 ⎝ ⎠
...P is the original ("before") amount, r is the % increase, and n is the number of years
r
Note that 1+ is the same value as the multiplier
100
Exam Tip

It is easier to multiply by the decimal equivalent "raised to a power" than to multiply by the decimal equivalent several times in a row

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Worked example

Jasmina invests £1200 in a savings account which pays compound interest at the rate of 2% per year for 7 years. Your notes

To the nearest pound, what is her investment worth at the end of the 7 years?

We want an increase of 2% per year, this is equivalent to a multiplier of 1.02, or 102% of the original amount

This multiplier is applied 7 times;

Therefore the nal value after 7 years will be

Round to the nearest pound

Alternative method Or use the formula for the nal amount

Substitute P is 1200, r = 2 and n = 7 into the formula

£1378 (to the nearest pound)

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Depreciation
What is meant by depreciation?
Your notes

Depreciation is where an item loses value

over time For example: cars, game
consoles, etc
Depreciation is usually calculated as a percentage decrease at the end
of each year This works the same as compound interest, but with a
percentage decrease
How do I calculate a depreciation?
You would calculate the new value after depreciation using the same method as
compound interest Identify the multiplier, p (1 - "% as a decimal")
10% depreciation would have a multiplier of p = 1 -
0.1 = 0.9 1% depreciation would have a multiplier
of p = 1 - 0.01 = 0.99
Raise the multiplier to the power of the number of years (or months etc)

pn
Multiply by the starting

value New value is A × pn

A is the starting
value p is the multiplier for the
depreciation n is the number of
years
⎜⎛ r ⎞⎟ n
⎜1 −
Alternative⎟ method: A formula for the nal ("after") amount is P where...
100 ⎝ ⎠
...P is the original ("before") amount, r is the % decrease, and n is the
number of years If you are asked to nd the amount the value has
depreciated by:
Find the di erence between the starting value and the new value

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Worked example

Mercy buys a car for £20 000. Each year its value depreciates by 15%. Find the value of the car after 3 full years. Your notes
Identify the multiplier

100% - 15% = 85% p = 1 - 0.15 = 0.85

Raise to the power of number of years

0.853

Multiply by the starting value

£20 000 × 0.853

= £12 282.50

Alternative method

Or use the formula for the nal amount Substitute P is 20 000, r = 15 and n = 3 into the formula

£12 282.50

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Exponential Growth & Decay

Your notes

Exponential Growth & Decay

The ideas of compound interest and depreciation can be applied to other (non-money)
situations, such as increasing or decreasing populations.

What is exponential growth?

When a quantity grows exponentially it is increasing from an original amount, P, by r
% each year for n years
Some questions use a di erent timescale, such as each day, or each minute
Real-life examples of exponential growth include population increases, bacterial
growth and the number of people infected by a virus
The same formula from compound interest is
used Final amount of the quantity is
⎜⎛ r ⎞⎟ n
P ⎜1 + ⎟
⎝ 100 ⎠
Substitute values of P, r and n from the question into the formula to nd the nal amount

What is exponential decay?

When a quantity exponentially decays it is decreasing from an original amount, P, by r
% each year for n years
Some questions use a di erent timescale, such as each day, or each minute
Real-life examples of exponential decay include the temperature of hot water cooling
down, the value of a car decreasing over time and radioactive decay (how radioactive
a substance is over time) The same formula from compound interest is used, but with
+r replaced by -r
Final amount of the quantity is
⎜⎛ r ⎞⎟ n
P ⎜1 − ⎟
⎝ 100 ⎠
Substitute values of P, r and n from the question into the formula to nd the nal amount

How do I use the exponential growth & decay formula?

To nd a nal amount, substitute the values of P, r and n (from the question)

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into the formula If the nal amount is given in the question, F, set the whole
formula equal to this nal amount

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⎜⎛ r ⎞⎟ n
P ⎜1 + ⎟ =F
⎝ 100 ⎠ Your notes

Some questions then ask to nd P, r or n

To nd P or r, rearrange the formula to make P or r the subject (for r, one of the
steps involves taking an nth root)
To nd n, use trial and improvement (test di erent whole-number values for n
until both sides of the equation balance)

Exam Tip

Remember, r is a percentage not a decimal For example, an increase of 25% means r = 25, not 0.25
Look out for how the question wants you to give your nal answer It may want the nal amount to the nearest thousand
If nding n, your answer should be a whole number

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Worked example
(a)An island has a population of 25 000 people. The population increases Your notes
exponentially by 4% every year. Find the population after 13 years, giving your
answer to the nearest hundred.

The question says “increases exponentially” so

use Substitute P = 25 000, r = 4 and n = 13

into the formula

Work out this value on your calculator

41626.83
…

Round this value to the nearest hundred

41 600 people

(b) The temperature of a cup of co ee exponentially decays from 60°C by r % each

hour. After 3 hours, the temperature is 18°C.

Write down an equation in terms of r.

The question says “exponentially decays” so

use Substitute P = 60 and n = 3 into the

formula

The nal value is 18, so set the whole formula equal to 18

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This is now an equation in terms of r

Your notes

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