Compound interest
Interest paid on previous interest. Final amount = P × (1 + r/100)t.
Compound interest pays interest on principal AND prior interest. After t years at r% per annum: A = P(1 + r/100)t. Compare with simple interest where the same multiplier applies but only to the original principal.
Worked examples
£5000 at 4% for 3 years: £5000 × 1.04³ = £5,624.32.
Same as simple interest? No. Simple = 5000 + 3×200 = £5,600.
£1000 doubling at 7% pa: ~10 years (Rule of 72: 72/7 ≈ 10).
Frequently asked questions
How does this differ from APR?
APR (Annual Percentage Rate) is a regulatory rate including fees, designed for comparing borrowing. AER is the savings equivalent.