What is the formula for calculating simple and compound interest and how does simple interest differ from compound interest?

In unit 3, we learnt the forms of investment opportunities and type of shares. It is important that investors know how interest is calculated when investing in fixed deposits. The simple and compound interest is calculated on fixed deposits. It is also important that learners must also be able to explain the differences between simple and compound interests. The interest, typically expressed as a percentage, can be either simple or compounded. Simple interest is based on the principal amount of a loan or deposit. In contrast, compound interest is based on the principal amount and the interest that accumulates on it in every period. In unit 3, we learnt about fixed deposit as one of the forms of investment. Unit 4 will look at how investors can earn interest using simple and compound interest. We will also look at the differences between simple and compound interest. The national diagnostic and Gauteng diagnostic reports revealed that some candidates can write the formula for simple and compound interest but struggle to arrive at the correct answer. Others use Mathematics instead of the Business Studies formula to calculate

simple and compound interest.

At the end of this Unit, you should be able to:

- Formulate scenarios on simple and compound interests
- Calculate simple and compound interest and show all calculations
- Explain the differences between simple and compound interest Important points to consider when teaching simple and compound interest
- Request learners to explain the meaning of simple and compound interest as baseline assessment.
- Use the following simple definitions of simple and compound interest:

o Simple interest : rate of interest calculated only on the principal amount

o Compound interest: earning interest on your savings, and also on the interest that those savings earn - Explain the meaning of principle amount and interest to enable learners to understand the meaning of these concepts
- Provide a detailed description of simple and compound interest using examples
- Learners must be advised to use the following Business Studies formula to calculate the simple and compound interests:

Calculating Simple interest

Simple interests: Interest = PxRxT where:

P is the principal/original amount of the investment

r is the interest rate

t is the period of the investment

VIDEO QR CODE

https://www.youtube. com/watch=2Qv6g59- AfM&ab_channel=The HowToScholar%3AEducation

Calculating compound interest

Compound interests: FORMULA: P x (1 + r)n where:

P is the principal/original amount of the investment

r is the interest rate

n is the number of the investment

VIDEO QR CODE

https://www.youtube.com/ watch=gnt4iL9gTaE

- Request learners to explain the differences between simple and compound interests using the following key words:

o Interest earned

o Principal amount

o Calculation of interest

o Return - Clarify misconceptions and errors by explaining how simple and compound interests are calculated
- Download the videos below on the calculation of simple and compound interest :

o https://www.youtube.com/watch?v=axZd-jd4q4E : Simple interest

o https://www.khanacademy.org/economics-finance-domain/corefinance/interest-tutorial/compound-interest-tutorial/v/introduction-tocompound-interest - Advise learners that they need to know both calculations and the differences between the simple and compound interests.
- NOTE: Explain the differences between the above mentioned concepts when doing the calculations in the classroom. Assessment on simple and compound interest
- Outline the differences between simple and compound interests
- Use the information given in the scenario to calculate simple and compound interest

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