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Cambridge (CIE) IGCSE Maths: Your notes

Extended
Simple & Compound Interest, Growth & Decay
Contents
Simple Interest
Compound Interest
Depreciation
Exponential Growth & Decay

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Simple Interest
Your notes
Simple Interest
What is simple interest?
Interest is money that is regularly added to an original amount of money
This could be added yearly, monthly, etc
When saving money, interest helps increase the amount saved
With debt, interest increases the amount owed
Simple interest refers to interest which is based only on the starting amount
Each interest payment (or charge in the case of debt) will be the same

How do I calculate simple interest?

To find the total simple interest earned
Find a percentage (the percentage rate) of the starting amount
Use a multiplier to do this (e.g. 0.05 to find 5%)
Multiply this by the number of time periods (e.g. years) it is being applied for
To find the total balance after the simple interest has been earned
Use the same method as above, and add this on to the starting amount

Examiner Tips and Tricks

Double check:
Does the question ask for the interest earned, or the total amount at the end?
Do you need to round your answer? (e.g. to the nearest hundred)

Worked Example

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A bank account offers simple interest of 4% per year. Nigel puts $ 250 into this bank account, and
leaves it to earn interest for 6 years.
Your notes
(a) Find the total amount of interest earned over the 6 year period.
Each year, 4% of the starting amount is added as interest
Find 4% of $ 250 using a multiplier
0.04 × 250 = 10
This amount of interest is earned every year, for 6 years
10 × 6 = 60
$ 60 of interest is earned
(b) Find the total amount in the bank account at the end of the 6 year period.
Add the amount of interest earned, found in part (a), to the starting amount
250 + 60 = 310
$ 310

Worked Example
Noah invests £ 9000 at a rate of n % simple interest per year, for 5 years. At the end of 5 years there
is £ 11 700 in the account. Find the value of n .

Find the total amount of interest earned over the 5 years

11 700 - 9 000 = £ 2 700 total interest
As we are dealing with simple interest, the same amount of interest is earned each year
Find the interest earned each year
2 700 ÷ 5 = £ 540 interest per year
Find what percentage of the original amount this represents

540
= 0 . 06 = 6%
9000
£ 540 is 6% of the original £ 9000

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n =6
Your notes

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Compound Interest
Your notes
Compound Interest
What is compound interest?
Compound interest is where interest is calculated on the running total, not just the starting amount
This is different from simple interest where interest is only based on the starting amount
E.g. $ 100 earns 10% interest each year, for 3 years
At the end of year 1, 10% of $ 100 is earned
The total balance will now be 100+10 = $ 110
At the end of year 2, 10% of $ 110 is earned
The balance will now be 110+11 = $ 121
At the end of year 3, 10% of $ 121 is earned
The balance will now be 121+12.1 = $ 133.10

How do I calculate compound interest?

Compound interest increases an amount by a percentage and then increases the new amount by the
same percentage
This process repeats each time period (yearly or monthly etc)
We can use a multiplier to carry out the percentage increase multiple times
To increase $ 300 by 5% once, we would find 300×1.05
To increase $ 300 by 5%, each year for 2 years, we would find (300×1.05)×1.05
This could be rewritten as 300×1.052
To increase $ 300 by 5%, each year for 3 years, we would find ((300×1.05)×1.05)×1.05
This could be rewritten as 300×1.053
This can be extended to any number of periods that the interest is applied for
If $ 2000 is subject to 4% compound interest each year for 12 years
Find 2000×1.0412, which is $ 3202.06
Note that this method calculates the total balance at the end of the period, not the interest earned
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Compound interest formula

An alternative method is to use the following formula to calculate the final balance Your notes

⎛ r ⎞⎟n
Final balance = P ⎜⎜1 + ⎟ where
⎝ 100 ⎠
P is the original amount,
r is the % increase,
and n is the number of years

r
Note that 1 + is the same value as the multiplier
100
e.g. 1.15 for 15% interest
This formula is not given in the exam

How do I solve reverse compound interest problems?

You could be told the final balance after compound interest has been applied, and need to find the
original amount
This could be referred to as a "reverse compound interest" problem
For example if:
The final balance is £432
After 20% interest has been applied each year
For 3 years
Using the same method as above, this can be written as an equation:

432 = P × 1 . 203 where P is the original amount

Solve for P ,

Divide both sides by 1 . 203

432 ÷ 1 . 203 = P
P = £ 250
In general, to find the original amount:

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Divide the final amount by m n where

m is the multiplier for the time period Your notes

and n is the number of time periods (usually years)

Examiner Tips and Tricks

Double check if the question uses simple interest or compound interest
The formula for compound interest is not given in the exam

Worked Example
Jasmina invests $ 1200 in a savings account, which pays compound interest at the rate of 4% per
year for 7 years.
To the nearest dollar, what is her investment worth at the end of the 7 years?
Method 1
We want an increase of 4% per year
This is equivalent to a multiplier of 1.04, or 104% of the original amount
This multiplier is applied 7 times
× 1 . 04 × 1 . 04 × 1 . 04 × 1 . 04 × 1 . 04 × 1 . 04 × 1 . 04 = 1 . 047
Therefore the final value after 7 years will be

1200 × 1 . 047 = $ 1579. 118135 . . .

Round to the nearest dollar

$ 1579
Method 2
⎛⎜ r ⎞⎟n
Using the formula for the final amount P 1 + ⎜ ⎟
⎝ 100 ⎠
Substitute P is 1200, r = 4 and n = 7 into the formula

⎛ 4 ⎞⎟7
1200 ⎜⎜1 + ⎟
⎝ 100 ⎠

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$ 1579
Your notes

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Depreciation
Your notes
Depreciation
What does depreciation mean?
Depreciation is where an item loses value over time
E.g. cars, mobile phones, 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 depreciation?

A similar method to compound interest can be used
Change the multiplier to one which represents a percentage decrease
e.g. a decrease of 15% would be a multiplier of 0.85
If a car worth $ 16 000 depreciates by 15% each year for 6 years
Its value will be 16 000 × 0.856, which is $ 6034.39
If you are asked to find the amount the value has depreciated by:
Find the difference between the starting value and the new value

Depreciation formula
An alternate method is to use the following formula to calculate the final balance

⎛ r ⎞⎟n
Final balance = P ⎜⎜1 − ⎟ where
⎝ 100 ⎠
P is the original amount,
r is the % increase
and n is the number of years

r
Note that all of 1 − is the multiplier
100
e.g. 0.75 for a 25% depreciation

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This formula is not given in the exam

Your notes

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.
Identify the multiplier
100% - 15% = 85%
m = 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
⎛ r ⎞⎟n
Use the formula for the final amount P ⎜⎜1 − ⎟
⎝ 100 ⎠
Substitute P = 20 000, r = 15 and n = 3 into the formula

⎛⎜ 15 ⎞⎟3
20 000 ⎜1 − ⎟
⎝ 100 ⎠
£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 by a percentage each
year for n years

Some questions use a different timescale, such as each day, or each minute
Real-life examples of exponential growth include:
Population increases
Bacterial growth
The number of people infected by a virus

What is exponential decay?

When a quantity exponentially decays it is decreasing from an original amount by a percentage each
year for n years

Some questions use a different 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
Radioactive decay (the mass of a radioactive a substance over time)

How can I model a scenario as exponential growth or decay?

Scenarios which exponentially grow or decay can be modelled with an equation
A useful format for this equation is

B = A × k n where:
A is the starting (initial) amount

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B is the new amount

k is the appropriate multiplier or scale factor for the growth or decay in the time period Your notes

E.g. k = 0 . 8 for a 20% decay, k = 1 . 2 for a 20% growth

n is the number of time periods

Note if k > 1 then it is exponential growth

If 0 < k < 1 then it is exponential decay

k cannot be negative
How do I use the exponential growth & decay equation?
You may need to rearrange the equation B = A × k n

B
To find A giving A =
kn

B B
To find k giving k n = so k = n
A A
To find n , using trial and improvement

Test different whole-number values for n until both sides of the equation balance

How does exponential growth and decay relate to

exponential graphs?
Plotting the exponential model B = A × k n on a graph where:

n is on the x-axis
and B is on the y-axis

gives the shape of an exponential graph

often written as y = ak x

Examiner Tips and Tricks

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Look out for how the question wants you to give your final answer
It may want the final amount to the nearest thousand Your notes
Or the question may require you to round to the nearest integer for n

Worked Example
An island has a population of 25 000 people.
The population increases 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 B = A × k n where k > 1

k comes from a percentage increase so add 0.04 to 1

k = 1 + 0 . 04
Substitute A = 25 000, k = 1.04 and n = 13 into the formula

25 000 × 1 . 0413
Work out the value on your calculator
41626.83…
Round to the nearest hundred
41 600 people

Worked Example
The temperature of a cup of coffee exponentially decays from 60°C by r % each hour. After 3 hours,
the temperature is 18°C.

Find the value of r to 3 significant figures.

The question says “exponentially decays” so use B = A × k n where 0 < k < 1

Note that k is the multiplier (it is not equal to r in the question, but is related)

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Substitute A = 60 and n = 3 into the equation

60 × k 3 Your notes

The temperature after 3 hours is 18, so set the whole equation equal to 18

60 × k 3 = 18
Solve this equation for k
Start by dividing both sides by 60

k 3 = 0.3
The left hand side is to the power of 3 (cubed)
So cube-root both sides and write out lots of decimal places

k = 3 0 . 3 = 0 . 669432950 . . .
Find the percentage decrease represented by this number
It may help to think of an example, e.g. k = 0.6 represents a decrease of 40%

1 − 0 . 669432950 . . . = 0 . 3305670499. . .
It represents a decrease by 33.05670...%
Round to 3 significant figures

r = 33.1

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