Leading the way in Microsoft Office Development

Simple Interest

If £50 is invested for 3 years at an annual interest rate of 5% what is the total amount after 3 years.

The total amount after 3 years will be £57.50.

The total amount accumulated using simple interest can be calculated with the following equation:

This is an example of an arithmetic progression where a series of numbers differs by a fixed amount.

Compound Interest

If £50 is invested for 3 years at an annual compounded interest rate of 5% what is the total amount after 3 years.

The total amount after 3 years will be £57.88.

The total amount accumulated using compounded interest can be calculated with the following equation:

This is an example of a geometric progression where a series of numbers is multipled by a fixed amount (or common ratio).

This is an example of discrete compounded interest.

Present Value

In the above example the original investment is often referred to as the Present Value.

If a bank offers a componded interest rate of 5% how much money do I need to invest in order to have $50 after 3 years.

The amount you need to invest at the beginning of the 3 years is £43.19.

The present value can be calculated with the following equation:

Things to Remember

There are actually two types of componded interest there is discretely compounded and continuously compounded.

Continously compounded interest is used in quantitative finance.