ABSTRACT
Most readers will have heard of 'interest' on money borrowed, and realised that it is an extra amount that is paid back to the borrower over and above the amount borrowed. But many people think of that extra amount as being trivial when, in fact and over time, it can become even greater than the amount borrowed (called the principal). To make sense of this, it must be explained that there are, broadly speaking, two types of interest - simple interest and compound interest. No financial insti tution uses simple interest but it would work as follows if they did. You want to invest £1000 over 10 years. Suppose your banker gives 10% per annum simple interest. Ten per cent of £1000 is £100, so you would earn £100 extra each year for 10 years. That is, in 10 years you would have £2000. So if you were borrowing instead of investing you would have to pay back over 10 years £2000 - i.e. £200 a year. You realise, of course, that you only borrowed £ 1000 and yet paid back £2000. However, for the convenience of having a £1000 lump sum when you need it, it might well be worth your while paying £200 a year for the privilege for 10 years.
