By: Eric Jin

Compounding periods
Rule of 72
Notes:
Compound interest is the other way that interest is calculated other than simple interest. The
difference between compound interest and simple interest is that compound interest is paid
on the principal along with interest earned while simple interest is only paid on the principal.

Compound interest can also be paid more than once a year. The number of payments is
determined by the compounding periods. For example, 12 compounding periods a year
means that interest is paid monthly and 12 times a year (note: the interest every time is paid
on the principal and the interest earned, so the amount earned on the 1st payment would not
be the same as the amount earned on the 12th payment).

The formula for calculating compound interest is:

A is the final value of the investment or loan.

P is the principal amount invested.

r is the rate of interest.

n is the number of compounding periods in one year.

t is the time (in years).

The rule of 72 is a rule that allows you to quickly estimate how long it will take an investment
to double. What you have to do is simply divide 72 by the interest rate (in percent). For
example, if I had an investment with 6% interest, it would take 12 years approximately to
double. If the interest rate was 12%, it would take 6 years to double.

Practice:

Slide 2:
Plugging in the numbers into the compound interest formula:

After solving for A, we get A = $10991.05.

By: Eric Jin

Slide 3:
After plugging the numbers into the compound interest formula:

Solving for A, we get that A = $10655.52. This is more than the last slide because the interest
is compounded semi-annually, meaning that payments came twice a year. That meant that the
amount of money the interest was paid on is more for every half a year in this slide.

Slide 4:
We can plug the numbers into the compound interest formula as follows:

Solving A, we get that A = $10292.10.

If the interest is compounded quarterly, then we just change the 2’s to 4’s.

After solving for A, we can get that A = $10293.17.

If the interest is compounded daily, then we just change the 4’s to 365’s.

After solving for A, we get that A = $10294.04.

If there are more compounding periods, then the interest earned is more and vice versa.

Slide 5:
Plugging the numbers into the compound interest formula:

Solving for A, we get that A = $6198.88.

By: Eric Jin

Slide 6:
Plugging the numbers into the compound interest formula:

Solving for A, we get that A = $11968.14 for 4 years.

Switching the 4 to a 12, we can get the future value for 12 years.

Solving for A, we get that A = $17142.75 for 12 years.

Switching the 12 to a 24, we can get the future value for 24 years.

Solving A, we get that A = $29387.37 for 24 years.

In order to solve for the future values, we simply subtract the principal amount from the future
value to get the interest. Then, we divide the interest earned by the principal amount to get
the rate of return.

4 year’s rate of return: 19.68% or 0.1968

12 year’s rate of return: 71.42% or 0.7142

24 year’s rate of return: 193.87% or 1.9387

Slide 7:
The takeaway from this side is that while simple interest is linear (because the interest is
being paid on the same principal every time), compound interest has an exponential graph
(because the interest is paid on increasing principals).

Slide 8:
See notes.

is approximately how long it would take for the investment to double: around 7.2 years.
By: Eric Jin

Slide 9:
The rule can also be used to solve for other things, such as the interest rate if only given time.
You would just have to make the interest a variable and then solve for it as you would a
normal equation.

Practice:
By: Eric Jin
By: Eric Jin