Before working through this section, make sure that you have worked through the previous section (click here to be taken through to the previous section).

**Example 1**

I borrow £500 at an interest rate of 7% for 8 years. I pay back the amount of money that I borrow and the interest that is due at the end of the 8 years. How much money do I pay back at the end of 8 years?

The process for working out the amount of money that is received when saving and the amount of money owed when saving is exactly the same. The only difference is whether the person is getting the money back (saving) or is paying back the bank (borrowing).

- When an individual is saving, they are giving money to the bank and the bank is keeping the money for a period of time (in all of our example, the period of time will be a few years). When the time period is up, the bank will pay the individual the original amount of money and some interest.
- When an individual is borrowing, the bank is giving them money for a period of time. When the period of time is up, the individual must pay the initial amount that has been borrowed plus an amount of interest back to the bank.

We are going to work out the amount of money that the individual owes the bank by using the generic formula, which is given below.

*x*in the above formula is the number of years, which is 8. The amount borrowed is £500. We can work out the multiplier by adding the amount of interest to 100% and dividing by 100. The interest that is paid on the amount borrowed is 7%, which when added to 100% is 107%. We then need to divide by 100, which means that the multiplier value is 1.07. We are now able to sub the appropriate values into their respective places in the formula.As this is money, it needs to be rounded to 2 decimal places

Therefore, after 8 years of borrowing £500 at an interest rate of 7%, the individual will owe the bank £859.09.

**Example 2 – A Depreciating Asset**

Depreciating means to fall in value. An example of a depreciating asset is a phone, which will decrease in value over time. Phones decrease in value because technology moves on and the battery life of the phone becomes worse. Another example of a depreciating asset is a car and a car is going to be our example.

I purchase a car for £25,000. The car decreases in value by 8% per year. How much will the car be worth in 4 years time?

We are going to be using the generic formula, but with a few modifications.

*x*in our formula is the number of years and in this example, we are looking at the value of the car after 4 years, so

*x*is 4. The initial value of the car is £25,000. Finally, we need to work out the multiplier. The value of the car is decreasing, and this means that we need to take the percentage decrease in the value of the car off of 100%. This gives us a percentage value of 92% (100%-8%). The next step is to divide our answer by 100, which gives us the multiplier as 0.92 (a multiplier with a value less than 1 will decrease our answer). We are now ready to use the formula.

As this is money, it needs to be rounded to 2 decimal places

After 4 years, the car is worth £17,909.82.

There are quite a few more questions in the quiz so have a go at answering those.

There are quite a few more questions in the quiz so have a go at answering those.