Description
Compound interest arises when interest is added to the principal of a deposit or loan, so that, from that moment on, the interest that has been added also earns interest. This addition of interest to the principal is called compounding.
SIMPLE
AND COMPOUND INTEREST
Since this section involves what can happen to your money, it should be of INTEREST to you!
IMPLE INTEREST FORMULA
Interest paid Annual interest rate
I = PRT
Principal (Amount of money invested or borrowed)
Time (in years)
100
Mahesh Renguntwar
If you invested $200.00 in an account that paid simple interest, find how long you’d need to leave it in at 4% interest to make $10.00.
enter in formula as a decimal
I = PRT
100 10 = (200)(0.04)T 1.25 yrs = T
Typically interest is NOT simple interest but is paid semiannually (twice a year), quarterly (4 times per year), monthly (12 times per year), or even daily (365 times per year).
Mahesh Renguntwar
COMPOUND INTEREST FORMULA
Principal (amount at start) annual interest rate (as a decimal)
amount at the end
? r? A ? P?1 ? ? ? n?
nt
time (in years)
number of times per year that interest in compounded
Mahesh Renguntwar
Find the amount that results from $500 invested at 8% compounded quarterly after a period of 2 years.
.08 r ? ? A ? 500 P?1 ? 4 ? ? n?
(2) 4 nt
A ? $585.83
Effective rate of interest is the equivalent annual simple rate of interest that would yield the same amount as that made compounding. This is found by finding the interest made when compounded and subbing that in the simple interest formula and solving for rate.
Find the effective rate of interest for the problem above. The interest made was $85.83. Use I = Prt 85.83=(500)r(2) the simple interest formula and solve for r to get the effective rate Mahesh Renguntwarr = .08583 = 8.583% of interest.
doc_155182655.pptx
Compound interest arises when interest is added to the principal of a deposit or loan, so that, from that moment on, the interest that has been added also earns interest. This addition of interest to the principal is called compounding.
SIMPLE
AND COMPOUND INTEREST
Since this section involves what can happen to your money, it should be of INTEREST to you!
IMPLE INTEREST FORMULA
Interest paid Annual interest rate
I = PRT
Principal (Amount of money invested or borrowed)
Time (in years)
100
Mahesh Renguntwar
If you invested $200.00 in an account that paid simple interest, find how long you’d need to leave it in at 4% interest to make $10.00.
enter in formula as a decimal
I = PRT
100 10 = (200)(0.04)T 1.25 yrs = T
Typically interest is NOT simple interest but is paid semiannually (twice a year), quarterly (4 times per year), monthly (12 times per year), or even daily (365 times per year).
Mahesh Renguntwar
COMPOUND INTEREST FORMULA
Principal (amount at start) annual interest rate (as a decimal)
amount at the end
? r? A ? P?1 ? ? ? n?
nt
time (in years)
number of times per year that interest in compounded
Mahesh Renguntwar
Find the amount that results from $500 invested at 8% compounded quarterly after a period of 2 years.
.08 r ? ? A ? 500 P?1 ? 4 ? ? n?
(2) 4 nt
A ? $585.83
Effective rate of interest is the equivalent annual simple rate of interest that would yield the same amount as that made compounding. This is found by finding the interest made when compounded and subbing that in the simple interest formula and solving for rate.
Find the effective rate of interest for the problem above. The interest made was $85.83. Use I = Prt 85.83=(500)r(2) the simple interest formula and solve for r to get the effective rate Mahesh Renguntwarr = .08583 = 8.583% of interest.
doc_155182655.pptx