The core SI and CI formulas, why they're identical in year one, and the 2-year difference shortcut that saves real time on this exam.
Simple interest is calculated on the original principal alone, for every year of the loan or investment — it never compounds on itself.
Because simple interest doesn't compound, the interest earned every single year is exactly the same amount — this is what makes reverse problems (finding the rate or time from a given interest) straightforward algebra.
Since simple interest is identical every year, a graph of the total amount over time is a straight line, unlike compound interest, which curves upward.
Compound interest is calculated on the principal plus all previously accumulated interest — each year's interest is added to the base before the next year's interest is calculated.
Compound interest always grows faster than simple interest over the same period, except in the first year, when the two are identical (since there's no prior interest yet to compound on).
In the very first year, simple and compound interest give exactly the same value, since there's no accumulated interest yet to compound — the difference only starts appearing from year two onward.
A specific, frequently tested pattern involves finding the difference between compound and simple interest over exactly 2 years — this has a clean, memorable shortcut formula.
This shortcut avoids calculating CI and SI separately and subtracting — it gives the difference directly from the principal and rate alone, for exactly a 2-year period.
For a 2-year period only, the gap between CI and SI reduces to a single clean term: principal times the rate (as a decimal) squared — no need to compute CI and SI separately and subtract.
All 5 questions with a full answer key.
Full solutions are in the downloadable PDF above.
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