Kindly I need some help on the following... I struggle to figure out how the following return of capital and interest is being calculated:
Examples:
Simple interest: £10,000 @ 5% for 3 years.
Year 1: £500 (£10,000 x 5%)
Year 2: £500 (£10,000 x 5%)
Year 3: £500 (£10,000 x 5%), in year 3. Return of capital and interest = £11,500
Compound interest: £10,000 @ 5% for 3 years compound.
Year 1: £500 (£10,000 x 5%)
Year 2: £525 ((£10,000 + £500) x 5%)
Year 3: £551.25 ((£10,000 + £500 + £525) x 5%) in year 3 return of capital and interest = £11,576.25
These are the answers I got from one of my resources. However, it's not quite clear to me where the final figures £11,500 and £11,576.25 came from? How are they calculated?
Please note, I am a beginner, thanks for your help in advance
ACCA Forums
TXReturn of capital and Interest
Basically,with compound interest you are gaining invest on previous interest sums as well as the initial capital sum invested.This is why the figures are different.On simple interest only five hundred pounds will be gained each year at interest rate of five percent per year.With compound interest you are adding interest to the capital sum plus all previously gained interest.If you need more help please ask.Do you mind if I ask what you are studying and at what level?
Sign into reply to this topic.