The amount of money, £P, in a savings account t years after 1st January 2011 is given by the formula P = 6000 xx 1.05^t. Does the account pay simple or compound interest. Explain how you know?

1 Answer
Dec 2, 2017

The account pays compound interest.

The whole of the previous amount is increased by 5%

Explanation:

The account pays compound interest.

The clue is in the power of t

This would mean 6000 xx1.05xx1.05xx1.05xx....... t times

1.05 = 105/100 = 100% +5%

So each time you multiply by 1.05 you are increasing the whole of the previous amount by 5%

For example, if t =5, then 6000xx1.05^5 means

color(blue)(6000 xx1.05)xx1.05xx1.05xx1.05xx1.05

=color(blue)(6300)xx1.05xx1.05xx1.05xx1.05

=6615xx1.05xx1.05xx1.05

=6945.75xx1.05xx1.05

=7293.0375 xx1.05

=7657.69

Each line represents another increase by 5%