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 A  P 1  
12% for 10 years  n
compounded 110
 .12 
yearly. 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%  r
for 9 years A  P 1  
compounded  n
monthly. (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
 $750 at 6.5% for 5  r
years compounded A  P 1  
annually  n
15
 .065 
A  7501  . 
 1 
A  7501.065
5

A  1027.56
 Problem:  Answer:

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

A  31492.80
 Problem:  Answer:

$680 at 5.5% for 1.5 nt

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

 $1500 at 4.5% for 2 nt

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

Assignment: Compound Interest

Worksheet