Simple and Compound Interest

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Simple and Compound Interest
What is interest?
Interest is the money paid back extra for a loan. When you take out a
loan, you are told that you have to pay money back to the bank so that they
can make a profit. Both of the types of interest below are ways that banks can
charge you or give you interest to your account. The rate of interest depends
on the type of account and how well the economic climate is.
What is Simple Interest?
The formula to work this out is:
I = Interest
P = Amount Borrowed (Principal)
R = Interest Rate
N = Years borrowed
So if you borrowed £1000 for 2 years at an interest rate of 3.4% you would
have to pay...
1000 x 3.4 x 2 = £6800 + £1000 = £7800
What is Compound Interest?
The amount of interest increases each year. As more money is added to the
account, the interest goes up.
For example: You have £1000 in your bank account. You get 10% each year. So
you will get an extra £100 = £1100
The next year you will have 10% interest on top of that
£1100 + £110 = £1210
Each year it will go up and up and up.


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