Consumer Mathematics: Financial Management
Compound interest
Interest calculated on the principal plus any interest already added, so it grows faster than simple interest.
| English | Compound interest |
|---|---|
| Bahasa Melayu | Faedah kompaun |
| 中文 | 复利 |
How it is used
RM1,000 is invested at 5% per year, compounded yearly, for 3 years. The maturity value is 1000 × (1.05)³ = 1000 × 1.157625 = RM1,157.63, so the compound interest earned is RM157.63.
Where it shows up in SPM
In Financial Management, compound interest appears in Paper 2 questions on savings, fixed deposits or loans, often asking you to compare the growth with simple interest over the same period, or to find the maturity value using P(1 + r)ⁿ.
Don't confuse it with
Open the chapter: Consumer Mathematics: Financial Management →
Frequently asked questions
What is n in P(1 + r)ⁿ?
n is the number of times interest is compounded. If it compounds yearly for 3 years, n = 3.
If it compounds twice a year for 3 years, use n = 6 and halve the yearly rate, so r becomes the rate for each half-year period.
Why does compound interest beat simple interest?
Because each year you earn interest on the interest already added, not just on the principal. Over 3 years RM1,000 at 5% gives RM157.63 compound but only 1000 × 0.05 × 3 = RM150 simple, a difference of RM7.63 that widens over more years.
Do I add the principal after using P(1 + r)ⁿ?
No. P(1 + r)ⁿ already gives the maturity value with the principal inside it.
To find only the compound interest, subtract the principal at the end: interest = P(1 + r)ⁿ − P.