Financial Maths Grade 9: Compound Interest Determine final amount #Finance

hello everyone in the previous lesson we looked at simple interest now we’re going to look at something called compound interest now let’s say you had a thousand rand and you wanted to put that in the bank for two years and the bank would give you ten percent pa or per that

stands for per year could you quickly pause the CashNews.co and work out how much would you have after one year don’t use any fancy formulas just think about it yourself all right so after one year well the bank says that they’re going to give you 10 so 10 of a thousand is 100 round so

the bank will give you 100 rand and so after one year your total amount should be a thousand one hundred now going into the second year the bank should still give you ten percent but they should actually give you ten percent of a thousand one hundred why because that is how much money you have you

don’t have the one thousand anymore can you see what just happened there so if we’re using simple interest which is what we did in the previous lesson the bank will keep giving you 100 rand every month even though you don’t have a thousand rand anymore so for simple interest after

one year you would have a thousand one hundred but then after the second year they will still give you they’ll only give you another 100 rand and so you would only have a thousand two hundred with compound interest the bank says oh wait a minute this person has a thousand one hundred round we

should give them ten percent of that and ten percent of a thousand one hundred is a hundred and ten rand and so now all of a sudden you have a thousand two hundred and ten rand see the difference if you had to go into year three simple interest they would still just give you a hundred grand in

compound interest they would give you 10 percent of your new amount that would be another 121 rand until now all of a sudden you have a thousand three hundred and thirty rand you see your money is starting to grow a lot faster using compound interest versus simple interest so just remember simple

interest has this formula that we looked at in the last i’m just going to say si for simple interest compound interest thankfully is very similar it’s almost identical but we just take the n and we put it over there that’s all so that’s compound interest i want to quickly

show you how simple interest grows simple interest grows remember they kept adding 100 grand so your money just goes up as a straight line adding 100 rand each year or each month no each year sorry with compound interest your money grows very it grows almost the same as simple interest in the

beginning but then it just starts getting faster and faster and faster and faster like that so compound interest makes your money grow very quickly compared to simple interest especially if you are investing over a very long time period like 20 years for example so all that you need to really do in

the exams and the tests and in class is see whether the teacher is talking about simple or compound and then you just use the correct formula all right so here’s quite a cool exercise we have to help someone decide whether they should use compound or a simple interest investment so it says

that the person will invest a thousand rand for 20 years and the bank will offer 10 per year now guys i would highly suggest that you pause the CashNews.co and try it yourself the answers are at the bottom so see if you can get to the answers all right for simple interest we know that the formula

is like this now p is your starting amount which is the 1000 rand i is your percentage which is 10 so i’ll say 10 over 100 and the number of years is 20. if you go type that in you would end up with 3 000 rand compound interest uses a equals p one plus i to the power of n and so p is a

thousand rand also ten percent but now the number of years is oh no we don’t put it there the number of years is 20 but we put it at the top so if you go type all that and you end up with 6 727 rand and 50 cents so you can see that compound interest begins to dominate now something

that’s really cool that you guys could try if you want to quickly see what would happen after 40 years well we could type that in because compound interest becomes very powerful over time so if we do this for 40 years this person would earn only 5 000 rand if the compound interest person win

for 40 years let’s see whoa 45 259 rand and 26 cents so look at that guys almost well more than nine times as much compound interest is very powerful over a long period of time this lesson