Compound interest

Interest earned on interest, A = P(1 + i)ⁿ. CAPS Grade 12 definition, worked NSC example and related financial maths practice.

Interest earned on interest, A = P(1 + i)ⁿ.

Definition

Compound interest is calculated on the original amount plus all previously added interest, so growth accelerates over time. The CAPS formula is A = P(1 + i)ⁿ where i is the rate per compounding period and n the number of those periods.

Worked example

R5 000 at 9% p.a. compounded monthly for 3 years: A = 5000(1 + 0,09/12)³⁶ ≈ R6 543,23.

Where it appears in the exam

Paper 1 finance questions use A = P(1 + i)ⁿ to find a future amount, the original amount, the interest rate or, with logarithms, the time.

Step-by-step method

  1. Convert the annual rate to a rate per period: i = r ÷ m.
  2. Find n = years × m.
  3. Substitute into A = P(1 + i)ⁿ.
  4. Round only the final answer, to two decimal places.

Common mistake

Using the annual rate with monthly periods instead of dividing the rate by 12.

Related financial maths terms

Frequently asked questions

What does compound interest mean in Grade 12 Maths?

Compound interest is calculated on the original amount plus all previously added interest, so growth accelerates over time. The CAPS formula is A = P(1 + i)ⁿ where i is the rate per compounding period and n the number of those periods.

Which NSC paper tests compound interest?

Compound interest belongs to the Financial maths section of CAPS Grade 12 Mathematics, which is examined in Paper 1.

How do I practise questions involving compound interest?

Snap a question that uses compound interest into the Snap&Learn AI solver, or work through the financial maths topic guide and NSC past papers.

Snap&Learn gives South African Matric learners instant, CAPS-aligned, step-by-step Mathematics solutions. Snap or upload a question and the AI shows every method mark the way the NSC memo awards them. Your first three AI solutions are free.