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Compound Interest

1. Compound interest is earned on both the principal amount invested as well as any interest that has accrued. This results in interest growing at an accelerated rate compared to simple interest, which is only earned on the principal amount. 2. The compound interest formula calculates the total amount by taking the principal amount, multiplying it by 1 plus the interest rate divided by the number of compounding periods, all raised to a power of the number of years times the number of compounding periods. 3. Compound interest examples show that even small differences in interest rates or time periods can result in much larger total amounts compared to simple interest due to the exponential

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81 views19 pages

Compound Interest

1. Compound interest is earned on both the principal amount invested as well as any interest that has accrued. This results in interest growing at an accelerated rate compared to simple interest, which is only earned on the principal amount. 2. The compound interest formula calculates the total amount by taking the principal amount, multiplying it by 1 plus the interest rate divided by the number of compounding periods, all raised to a power of the number of years times the number of compounding periods. 3. Compound interest examples show that even small differences in interest rates or time periods can result in much larger total amounts compared to simple interest due to the exponential

Uploaded by

Rudi Berlian
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Compound Interest

Does anyone have any interest in


interest?

Very few banks today pay interest


based on the simple interest
formula. Instead, they pay interest
by using a principle called
compounding.
The difference between simple and
compound interest is this: Simple
interest grows slowly, compounding
speeds up the process.
How it works.

Simple interest is interest on the


principle amount.

Compound interest is when your


principle and any earned interest
both earn interest.
Consider this example: You begin with
$100 invested at 10% annual interest.

After Simple Interest Compound


Interest
1 year 110 110
2 years 120 121
3 years 130 133
4 years 140 146
5 years 150 161
10 years 200 259
20 years 300 672
50 years 600 11,739
Compound Interest Wins!!

From this example, it is easy to see


that if you are saving money, you
would prefer compound interest.
Calculate compound interest using this
formula:
nt
 r
A  p 1  
 n

A—Total amount
p —principle
r —interest rate
n —number of compounding periods
t —time in years
Example: $100 is invested at 10%
interest compounded yearly for 6 years

177.16
$250 invested at 6.5% for 8 years
compounded monthly.

419.92
Example……
 $500 invested at 12% for 10 years
compounded yearly.
Answer……
 Problem:
Answer:
nt
 r
 $500 invested at 12% A  10
for  
P1years
compounded yearly.  n
110
 .12 
A  5001  
 1 
A  5001.12 
10

A  1552.93
Example……
 $1000 at 7.25% for 9 years
compounded monthly.
Answer……
 Problem:
Answer:

nt
 $1000 at 7.25% for 9 years compounded
 r
monthly. A  P 1  
 n
(129 )
 .0725 
A  10001  
 12 
A  1916.57
Try these:
1. $750 at 6.5% for 5 years compounded
annually

2. $25,000 at 8% for 3 years compounded


annually

3. $680 at 5.5% for 1.5 years compounded


monthly

4. $1500 at 4.5% for 2 years compounded


monthly
 Problem:
Answer:
nt
  annually
$750 at 6.5% for 5 years compounded r
A  P 1  
 n
15
 .065 
A  7501  . 
 1 
A  7501.065
5

A  1027.56
 Problem:
Answer:

nt

 r annually
$25,000 at 8% for 3 years compounded
A  P 1  
 n
13
 .08 
A  250001  . 
 1 
A  250001.08
3

A  31492.80
 Answer:
Problem:

nt
$680 at 5.5% for 1.5 years compounded monthly
1.
 r
A  P 1  
 n
121.5
 .055 
A  6801  
 12 
A  738.34
 Problem:
Answer:

 $1500 at 4.5% for 2 years compounded monthly


nt
 r
A  P 1  
 n
122
 .045 
A  15001  
 12 
A  1640.99
Look
how
compounding
works!
Homework

Assignment: Compound Interest


Worksheet

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