Compound interest is calculated as a percentage of the total amount in the account at the end of each year.
Compound interest = balance at start of year × interest rate ÷ 100 Example
Carolyn O’Malley puts €500 into a savings account in her local bank and leaves it there for three years. The compound interest is calculated at 5% each year. Year 1 2 3
Balance at start of year Interest Balance at end of year €500 €525
€25 €551.25 Total interest
Find out the current AER rate in some Irish banks. Record it in the Economy Watch section of your
Activities and Accounts Book and monitor it.
As you can see, Carolyn earned €3.81 more interest than Laila. A savings account that offers compound interest is better for the customer because the interest earned increases each year as the total amount in the account increases.
The compound interest rate for savers is called the Annual Equivalent Rate (AER) or the Compound Annual Return (CAR).
The higher the AER or CAR is, the more interest the account holder earns. These rates differ between financial institutions, so it is always a good idea to shop around.
€26.25 €27.56 €78.81
€525
€551.25 €578.81
Calculating compound interest A
Go to page 58 of your Activities and Accounts Book to practise calculating compound interest.
