44 Money mathematics
Norman is a super salesperson when it comes to bikes. He also sees it as his duty to get
everyone on a bike, so he is delighted when a customer comes into his shop and without
any hesitation buys a bike for £99. The customer pays for it with a cheque for £150, and
as the banks are closed, Norman asks his neighbour to cash it. He returns, gives his
customer the change of £51 who then rides off at speed. Calamity follows. The cheque
bounces, the neighbour demands his money back, and Norman has to go to a friend to
borrow the money. The bike originally cost him £79, but how much did Norman lose
altogether?
The concept of this little conundrum was proposed by the great puzzlesmith
Henry Dudeney. It is money mathematics of a sort, but more accurately a puzzle
connected with money. It shows how money depends on time and that inflation
is alive and well. Writing in the 1920s, Dudeney’s bike actually cost the customer
£15. A way to combat inflation is through the interest on money. This is the stuff
of serious mathematics and the modern financial market place.
Compound interest
There are two sorts of interest, known as simple and compound. Let’s turn our
mathematical spotlight onto two brothers, Compound Charlie and Simple Simon.
Their father gives them each £1000, which they both place in a bank. Compound
Charlie always chooses an account that applies compound interest but Simple
Simon is more traditional and prefers accounts that use simple interest.
Historically, compound interest was identified with usury and frowned upon.
Nowadays compound interest is a fact of life, central to modern monetary
systems. Compound interest is interest compounded on interest, and that is why
Charlie likes it. Simple interest does not have this feature and is calculated on a
set amount known as the ‘principal’. Simon can understand it easily, as the
principal earns the same amount of interest each year.