Using simple interest formula for compound interest
"The Simple Mistake"
The Mistake in Action
£1000 is invested at 5% compound interest for 3 years. Find the final amount.
Wrong: Interest per year = $1000 \times 0.05 = £50$ Total interest = $50 \times 3 = £150$ Final amount = $1000 + 150 = £1150$
Why It Happens
Students calculate interest on the original amount each year, not realising compound interest builds on previous interest.
The Fix
With compound interest, each year's interest is added before calculating the next year's interest.
Year 1: $1000 \times 1.05 = £1050$ Year 2: $1050 \times 1.05 = £1102.50$ Year 3: $1102.50 \times 1.05 = £1157.63$
Or use the formula: $1000 \times (1.05)^3 = £1157.63$
Difference: Compound gives £7.63 more than simple interest.
Spot the Mistake
Can you identify where this student went wrong?
£1000 at 5% for 3 years
Interest = $50 \times 3 = £150$
Click on the line that contains the error.
Related Topics
Learn more about the underlying maths: