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MC Simple and Compound Interest

Simple interest is calculated only on the original principal amount, while compound interest is calculated on both the principal and previously earned interest. The document provides formulas for calculating simple and compound interest, along with examples demonstrating how to apply the formulas. It also provides problems for calculating interest earned in various scenarios involving simple and compound interest over different periods of time and rates.

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Tang Siew Eng
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346 views3 pages

MC Simple and Compound Interest

Simple interest is calculated only on the original principal amount, while compound interest is calculated on both the principal and previously earned interest. The document provides formulas for calculating simple and compound interest, along with examples demonstrating how to apply the formulas. It also provides problems for calculating interest earned in various scenarios involving simple and compound interest over different periods of time and rates.

Uploaded by

Tang Siew Eng
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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SIMPLE AND COMPOUND INTEREST

SIMPLE INTEREST is interest paid only on the original amount of the principal at each specified interval (such as annually). The formula is I = Prt, where I = Interest, P = Principal (money at the start), r = interest rate, and t = time. COMPOUND INTEREST is interest paid on both the original principal and the interest earned previously. The formula for compound interest is A = P(1 + r)t , where A = total amount including previous interest earned, P = principal, r = interest rate, and t = time.

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Example 1
Wayne earns 4.7% simple interest for 5 years on $4500. How much interest does he earn? Put the numbers in the formula I = Prt. Change the percent to a decimal. Multiply. I = 4500(4.7%)5 = 4500(0.047)5 = 1057.50 Wayne would earn $1057.50 interest.

Example 2
Use the numbers in Example 1 to find how much money Wayne would have if he earned 4.7% interest compounded annually. Put the numbers in the formula A = P(1 + r)t. A = 4500(1 + 4.7%)5 Change the percent to a decimal. Multiply. = 4500(1 + 0.047)5 = 5661.69 Wayne would have $5661.69.

Subtract the results of the two examples to compare the difference in earnings when Wayne is earning compound interest instead of simple interest. Wayne would earn $1161.69 in compound interest: $5661.69 $4500 = $1161.69. $1161.69 $1057.50 = $104.19, so Wayne would have $104.19 more with compound interest than he would have with simple interest.

Problems
Solve the following problems. 1. 2. Tong loaned Jody $70 for a month. He charged 5% simple interest for the month. How much did Jody have to pay Tong? Jessicas grandparents gave her $5000 for college to put in a savings account until she starts college in four years. Her grandparents agreed to pay her an additional 6.5% simple interest on the $5000 for every year. How much extra money will her grandparents give her at the end of four years? David read an ad offering 7 4 % simple interest on accounts over $1500 left for a minimum of 5 years. He has $1500 and thinks this sounds like a great deal. How much money will he earn in the 5 years? Javiers parents set an amount of money aside when he was born. They earned 5.25% simple interest on that money each year. When Javier was 15, the account had a total of $1181.25 interest paid on it. How much did Javiers parents set aside when he was born? Kristina received $125 for her birthday. Her parents offered to pay her 4.25% simple interest per year if she would save it for at least one year. How much interest could Kristina earn in a year? Kristina decided she would do better if she put her money in the bank for one year, which paid 3.75% interest compounded annually. Was she right? Suppose Jessica (from problem 2) had put her $5000 in the bank at 2.85% interest compounded annually. How much money would she have earned there at the end of the 4 years? Mai put $3750 in the bank at 3.87% interest compounded annually. How much was in her account after 7 years? What is the difference in the amount of money in the bank after five years if $3500 is invested at 3.4% interest compounded annually or at 2.8% interest compounded annually? Elizabeth was listening to her parents talking about what a good deal compounded interest was for a retirement account. She wondered how much money she would have if she invested $2000 at age 20 at 2.8% interest compounded quarterly (four times each year) and left it until she reached age 65. Determine what the value of the $2000 would become. Elizabeth decided to try another problem. If she invested $2500 at age 25 at 2.65% interest compounded quarterly, how much would it be worth when she reached age 65? Compare your answers for problems 10 and 11. What are your conclusions?
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4.

5.

6. 7.

8. 9. 10.

11. 12.

Answers
1. 2. 4. 6. I = 70(0.05)1 = $3.50; Jody paid back $73.50. I = 5000(0.065)4 = $1300 $1181.25 = x(0.0525)15; x = $1500 3. 5. I = $1500(0.0725)5 = $543.75 I = 125(0.0425)1 = $5.31

A = 125(1 + 0.0375)1 = $129.69; No, for one year she needs to take the higher interest rate if the compounding is done annually. Only after one year will compounding outstrip simple interest. A = 5000(1 + 0.0285)4 = $5594.83 Jessica would have earned $594.83. 8. A = 3750(1 + 0.0387)7 = $4891.73

7. 9. 10. 11. 12.

A = 3500(1 + 0.034)5 3500(1 + 0.028)5 = $4136.86 $4018.22 = $118.64 A = 2000(1 + 0.028)180 (because 45 4 = 180 quarters) = $288,264.15 A = 2500(1 + 0.0265)160 (because 40 4 = 160 quarters) = $164,199.79 You should see that the number of years is an important factor when interest is compounded.

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