Compound Interest

• A sum P of money (the principal) is invested

at simple interest rate r .
• The interest after one year is Pr .
– So, if P = $1000 and the interest rate is 9% per
year, then…
• r = 0.09 , and…
• the interest after one year is $1000(0.09) = $90.
 Interest (cont’d)
• If the interest is reinvested with the principal at
the end of the interest period, then the new
principal is
P + Pr , or, equivalently, P(1 + r) .
• After another interest period has elapsed, we
can find the new principal by multiplying P(1
+ r) by (1 + r) , giving P(1 + r)2 .
 Interest (cont’d)
• If we continue to invest, then the compound
interest after…
– …three periods is P(1 + r)3 ;
– …four periods is P(1 + r)4 ;
– …k interest periods is
A = P(1 + r)k .
• Note so far we have used r to denote the
interest rate per interest period.
 Interest (cont’d)
• Thus, if the annual interest rate is r , then the
interest rate per interest period is r/n , where
n is the number of interest periods per year.
• For example, if the rate is stated as 6% per
year compounded monthly, then…
– the rate per month is (6/12)%, or 0.5% , so…
– r = 0.005.
 Compound Interest Formula
• This leads to the following compound interest
formula:
Example
Example (cont’d)
Example (cont’d)
Example : A sum of RM 8000 is invested at an
interest rate of 8% per year. Find the amount in

the account after 4 years if interest is

i) compounded annually,
ii) semiannually, monthly and daily.
P = RM 8000, r = 0.08, t = 4.

Annual n=1

Semiannually n = 2
Monthly n = 12
12  4 
 0.08 
A t   80001    RM 11005
 12 

Every day n = 365

365 4 
 0.08 
A t   80001    RM 11016
 365 
 The Equality Property for Exponential
Functions

Suppose b is a positive number other

than 1. Then b x  b x 1 2
if and only if
x1  x 2 .
Basically, this states that if the bases are the same, then we
can simply set the exponents equal.

This property is quite useful when we

are trying to solve equations
involving exponential functions.
 Example :

3 2x 5
3 x 3
(Since the bases are the same we
simply set the exponents equal.)
2x  5  x  3
x5 3
x8

EXERCISE
1
x 5
2
3x 1
2 3
This problem is what to do when the
bases are not the same.
 27
2x  3 x 1
3
 Example

32x  3  27x 1
32x  3  33( x 1) (our bases are now the same
so simply set the exponents equal)
2x  3  3(x 1)
2x  3  3x  3
x  3   3
x  6
x6
Example
1 Remember a negative exponent is simply
16 
x 1
another way of writing a fraction
32
The bases are now the same
2
4(x 1) 5
2 so set the exponents equal.

4(x 1)   5
4x  4   5
4x   9
9
x
4
 Problems
2 x 1 1
Problem 1 : 3 
9
Problem 2 : 4 x 3  8 2 x 1
Problem 3 : Example 5 and 8 from the text book on
pages 294 and 298 respectively