Financial Maths Grade 11 | Simple and Compound Revision #Finance

John invests 10 000 Rand in an investment scheme for three years which offers him an interest rate of eight percent PA stands for per annum which also means per year the first question asks us to calculate how much John will have in three years time if the interest rate is or if the

interest is going to be simple interest and then I’ve put the answer there just so we can compare at the end so guys if you have money that you decide to invest what that means is you place that money in some type of an account and the place where you are holding your money which could be a

bank for example they will give you in they will give you interest they will reward you for keeping your money in the bank now we get two different kinds of interest we get simple interest and we get compound interest so for number one we’re gonna do simple interest so let’s have a look

and see how that works okay so just imagine you had ten thousand Rand now this bank is giving you eight percent per annum so every year that you have your money in their bank they will reward you with eight percent eight percent of what well eight percent of the ten thousand Rand now what is eight

percent of ten thousand Rand well that you could just simply tap on the calculator you could just say eight over one hundred times by a ten thousand and what that would give you is 800 Rand so every year that you keep your money in this bank they will give you 800 Rand so after one year how much

will John have he’ll have ten thousand eight hundred that’s after one year how much would you have after two years now some of you watching this might be a little bit hesitant to Simply add 800. but if we add 800 we gonna end up with eleven thousand six hundred now what seems a bit

weird about that why have we just added 800 Rand because imagine you are John you start investing and after one year you have ten thousand eight hundred Rand now the bank has told you that they’re gonna give you eight percent per year but you don’t have ten thousand Rand now you have

ten thousand eight hundred grand so surely they should give you eight percent of the new amount well that’s what compound interest is called simple interest however doesn’t work like that simple interest looks at the initial amount which is the 10 000 Rand they work out to eight percent

of that which is 800 and they will simply use that 800 going forward so every year that John keeps his money in the bank they will earn or he will earn 800 Rand per year so after three years John would have a total of 12 400 Rand okay that is called simple interest it’s very simple it’s

easy you don’t have to update your calculations you can simply say oh 800 Rand if you earned 800 Rand every year then in three years he’ll earn 2 400 Rand and that plus 10 000 gives us twelve thousand four hundred compound interest however is more in line with reality this is how it

works in real life so after one year we said that John has 10 800 Rand right because eight percent of ten thousand was eight hundred and so we add that and we get ten thousand eight hundred now when you go into the second year the bank’s gonna give them eight percent again but now it’s

gonna be eight percent of ten thousand eight hundred Rand so eight percent or eight over a hundred sorry times ten thousand eight hundred gives us 864 Rand so if we add that to the 10 800 John now has 11 664 Rand after the second year so now going into the third year the bank will give him eight

percent again but now it’s eight percent of eleven thousand six hundred and sixty sorry 11 664. and if you work out eight percent of 11 664 you’re gonna get nine hundred and thirty three point one two Rand for that year and then if you add that to the 11 664 John’s gonna have a

total amount of twelve thousand five hundred and ninety seven Rand and 12 cents so if you were an investor would you prefer simple or compound interest definitely compound interest because when you do compound interest the amount that you are taking the percentage of continuously changes instead of

using the original amount that you have