Simple Interest

Money in a bank account usually accrues compound interest. Compounded interest means that the amount of money is multiplied by a constant factor at the end of each time period to obtain the amoun in the account at the start of the next period. If £500 is invested at an interest rate of 10% per year, then after n years the amount in the account will be

If the interest is simple interest, then the yearly amount of interest will be calculated on the original deposit.

Example: If you deposit £500 into an account paying 10% simple interest then the balance increases at a constant rate ofper year.

Initially there is £500 in the account.

After 1 year there isin the account.

After 2 years there isin the account.

After 3 years there isin the account.

After 4 years there isin the account.

After n years there will bein the account.

Simple interest means that eventually the amount in the account will start falling in real terms. For the example given above, if the rate of inflation is 5%, after 11 years there will be £1050 in the account. Interest at 5% would be needed to maintain the value of the money in real terms, so at the end of the next year there would be

In fact there will only be

You have no rights to post comments