Savings (SQA National 5 Applications of Mathematics): Revision Note

Savings

What is a simple interest rate savings account?

• Money saved in an account with a simple interest rate increases by a constant amount

  • The interest is based on the amount invested when opening the account

  • The interest can be added in equal yearly instalments or at the end of the investment period

• For example, you might earn £80 at the end of three years for every £1000 initially invested

What is a compound interest rate savings account?

• Money saved in an account with a compound interest rate increases each year by a percentage

  • The interest rate is usually fixed

• The percentage is based on the amount in the account at the start of the year

  • This means that you earn interest on any previously received interest

    • This is why it is called compound interest

• For example, consider investing £1000 in an account with an interest rate of 3% per year

  • In the first year you receive 3% of £1000 = £30

    • Your amount is now £1030

  • In the second year you receive 3% of £1030 = £30.90

    • Your amount is now £1060.90

How can I calculate the final value using compound interest?

• You can break the problem down on a year-by-year basis

  • Find the amount earned each year

  • Find the new amount at the end of the year

• Alternatively, you can use a compound percentage change method

  • Find the multiplier

  • Raise to the power of the number of years

  • Multiply by the amount invested