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O Level Maths Cambridge Your notes
Simple & Compound Interest, Growth & Decay

Contents
Simple Interest
Compound Interest
Exponential Growth & Decay
Page 1 of 11
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Simple Interest
Your notes
Simple Interest
What is simple interest?
Interest is extra money added every year (or month) to an original amount of money
Simple interest is interest that is the same amount each time
It can be good: for example, putting £100 into a bank account and the bank rewarding you
with simple interest of 10% every year
After one year you’d have £110, after two years you’d have £120, …
It can be bad: for example, owing £100 to a friend and they charge you simple interest of 10%
for every year you don’t pay them back
After the first year you’d owe them £110, after the second year you’d owe them £120, …
If £P is your initial amount of money and simple interest is added to it at a rate of R% per year for T
years, then the total amount of interest gained, £I, is given by the formula
PRT
I=
100
Remember that this formula calculates the amount of simple interest added over T years, not the
total amount of money after T years
To find the total amount of money after T years, add the interest £I to the original amount £P
Exam Tip
Exam questions will state “simple interest” clearly in the question, to avoid confusion with
compound interest
Pay attention to how some questions want the final answers (for example, to the nearest
hundred)
Page 2 of 11
Worked example
Your notes
A bank account offers simple interest of 8% per year. I put £250 into this bank account for 6
years. Find
(a) the amount of interest added over 6 years,
(b) the total amount in my bank account after 6 years.
(a) Substitute P = 250, R = 8 and T = 6 into the formula to find the simple interest, I
The amount of interest over 6 years is £120

(b) The total amount after 6 years is the original amount, £250, plus the interest from part (a), £120
250 + 120
The total amount in my bank account after 6 years is £370
Page 3 of 11
Compound Interest
Your notes
Compound Interest
What is compound interest?
Compound interest is where interest is paid on the interest from the previous year (or whatever
time frame is being used), as well as on the original amount
This is different from simple interest where interest is only paid on the original amount
Simple interest goes up by the same amount each time whereas compound interest goes up
by an increasing amount each time
How do you work with compound interest?

Keep multiplying by the decimal equivalent of the percentage you want (the multiplier, p)
A 25% increase (p = 1 + 0.25) each year for 3 years is the same as multiplying by 1.25 × 1.25 × 1.25
Using powers, this is the same as × 1.25 3
In general, the multiplier p applied n times gives an overall multiplier of pn
If the percentages change varies from year to year, multiply by each one in order
a 5% increase one year followed by a 45% increase the next year is 1.05 × 1.45
In general, the multiplier p1 followed by the multiplier p2 followed by the multiplier p3... etc gives an
overall multiplier of p1p2 p3...
⎛ r ⎞⎟n
Alternative method: A formula for the final ("after") amount is P ⎜⎜1 + ⎟ where...
⎝ 100 ⎠
...P is the original ("before") amount, r is the % increase, and n is the number of years
r
Note that 1 + is the same value as the multiplier
100
Exam Tip
It is easier to multiply by the decimal equivalent "raised to a power" than to multiply by the
decimal equivalent several times in a row
Page 4 of 11
Worked example
Your notes
Jasmina invests £1200 in a savings account which pays compound interest at the rate of 2% per
year for 7 years.
To the nearest pound, what is her investment worth at the end of the 7 years?
We want an increase of 2% per year, this is equivalent to a multiplier of 1.02, or 102% of the original
amount
This multiplier is applied 7 times;
Therefore the final value after 7 years will be
Round to the nearest pound
Alternative method
Or use the formula for the final amount

Substitute P is 1200, r = 2 and n = 7 into the formula
£1378 (to the nearest pound)
Page 5 of 11
Depreciation
What is meant by depreciation? Your notes
Depreciation is where an item loses value over time
For example: cars, game consoles, etc
Depreciation is usually calculated as a percentage decrease at the end of each year
This works the same as compound interest, but with a percentage decrease
How do I calculate a depreciation?
You would calculate the new value after depreciation using the same method as compound
interest
Identify the multiplier, p (1 - "% as a decimal")
10% depreciation would have a multiplier of p = 1 - 0.1 = 0.9
1% depreciation would have a multiplier of p = 1 - 0.01 = 0.99
Raise the multiplier to the power of the number of years (or months etc)
pn
Multiply by the starting value
New value is A × p n
A is the starting value
p is the multiplier for the depreciation
n is the number of years
⎛ r ⎞⎟n
Alternative method: A formula for the final ("after") amount is P ⎜⎜1 − ⎟ where...
⎝ 100 ⎠
...P is the original ("before") amount, r is the % decrease, and n is the number of years
If you are asked to find the amount the value has depreciated by:
Find the difference between the starting value and the new value
Page 6 of 11
Worked example
Your notes
Mercy buys a car for £20 000. Each year its value depreciates by 15%.
Find the value of the car after 3 full years.
Identify the multiplier
100% - 15% = 85%
p = 1 - 0.15 = 0.85
Raise to the power of number of years
0.85 3
Multiply by the starting value
£20 000 × 0.85 3
= £12 282.50
Alternative method
Or use the formula for the final amount

Substitute P is 20 000, r = 15 and n = 3 into the formula
£12 282.50
Page 7 of 11

Your notes
The ideas of compound interest and depreciation can be applied to other (non-money) situations,
such as increasing or decreasing populations.
What is exponential growth?

When a quantity grows exponentially it is increasing from an original amount, P, by r % each year
for n years
Some questions use a different timescale, such as each day, or each minute
Real-life examples of exponential growth include population increases, bacterial growth and the
number of people infected by a virus
The same formula from compound interest is used
Final amount of the quantity is
⎛ r ⎞⎟n
P ⎜⎜1 + ⎟
⎝ 100 ⎠
Substitute values of P, r and n from the question into the formula to find the final amount
What is exponential decay?

When a quantity exponentially decays it is decreasing from an original amount, P, by r % each
year for n years
Some questions use a different timescale, such as each day, or each minute
Real-life examples of exponential decay include the temperature of hot water cooling down, the
value of a car decreasing over time and radioactive decay (how radioactive a substance is over
time)
The same formula from compound interest is used, but with +r replaced by -r
Final amount of the quantity is
⎛⎜ r ⎞⎟n
P 1−
⎜ ⎟
⎝ 100 ⎠
Substitute values of P, r and n from the question into the formula to find the final amount
How do I use the exponential growth & decay formula?
Page 8 of 11
To find a final amount, substitute the values of P, r and n (from the question) into the formula
If the final amount is given in the question, F, set the whole formula equal to this final amount
⎛⎜ r ⎞⎟n Your notes
P ⎜1 + ⎟ =F
⎝ 100 ⎠
Some questions then ask to find P, r or n
To find P or r, rearrange the formula to make P or r the subject (for r, one of the steps
involves taking an nth root)
To find n, use trial and improvement (test different whole-number values for n until both
sides of the equation balance)
Exam Tip
Remember, r is a percentage not a decimal
For example, an increase of 25% means r = 25, not 0.25
Look out for how the question wants you to give your final answer
It may want the final amount to the nearest thousand
If finding n, your answer should be a whole number
Page 9 of 11
Worked example
Your notes
(a) An island has a population of 25 000 people. The population increases exponentially by 4%
every year. Find the population after 13 years, giving your answer to the nearest hundred.
The question says “increases exponentially” so use

Substitute P = 25 000, r = 4 and n = 13 into the formula
Work out this value on your calculator
41626.83…
Round this value to the nearest hundred

41 600 people
(b) The temperature of a cup of coffee exponentially decays from 60°C by r % each hour. After 3
hours, the temperature is 18°C.
Write down an equation in terms of r.
The question says “exponentially decays” so use

Substitute P = 60 and n = 3 into the formula
The final value is 18, so set the whole formula equal to 18
Page 10 of 11
Your notes
This is now an equation in terms of r
Page 11 of 11

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O Level Maths Cambridge Your notes

Simple & Compound Interest, Growth & Decay

The amount of interest over 6 years is £120

The total amount in my bank account after 6 years is £370

How do you work with compound interest?

Therefore the final value after 7 years will be

Round to the nearest pound

Or use the formula for the final amount

£1378 (to the nearest pound)

Or use the formula for the final amount

Exponential Growth & Decay

What is exponential growth?

What is exponential decay?

How do I use the exponential growth & decay formula?

The question says “increases exponentially” so use

Work out this value on your calculator

Round this value to the nearest hundred

Write down an equation in terms of r.

The question says “exponentially decays” so use

The final value is 18, so set the whole formula equal to 18

This is now an equation in terms of r

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