Simple and

Compound Interest
Dr. Saad Nawaz
Simple Interest

 I = prt; where p is principal, r is the rate and t is

the time in years.
 Interest – The amount earned or paid for the
use of money.
 Principal – The amount of money borrowed or
deposited.
 Simple Interest – The amount paid only on the
principal
 Annual Interest Rate – The percent of the
principal earned or paid per year.
Examples

1. A $1000 bond earns 6% simple annual

interest. What is the simple interest
earned after 4 years?
2. Find the simple interest earned on
$500 after 5 years in a money market
account paying 5%.
Balance (A)

 The amount of an account that earns

simple interest is the sum of the interest
and the principal.
 A = p + prt or A = p(1 + rt)
 You can use either formula to get the
balance when calculating the balance
after simple interest.
Examples

1. Susan deposits $2000 into her savings

account. What is her balance after she
earns 7% simple interest for 6 years?
2. Find the unknown amount
A=?
p = $1000
r = 7%
t = 6 years
Examples

3. A = $1424.50
p=?
r = 3.5%
t = 6 months
Remember time must be in years!!!
Compound Interest

 The interest that is earned on both the

principal and any interest that has been
previously earned.
 Formula A = p(1 + r)t
 Example – You deposit $1200 into an
account that earns 3.8% interst
compounded annually. Find the balance
after 5 years.
Examples

1. You deposit $1200 into an account that

earns 3.8% interest compounded
annually. Find the balance after 5
years.
2. Max borrows $3500 for a new car. The
loan has 6.7% interest that will be
compounded annually. How much
money will he owe after 36 months?