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 principal
amount.

Compound interest is when your principal

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:
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
A  P 1  
 $500 invested at 12% for  n
110
10 years compounded  .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
 r
 $1000 at 7.25% for 9 A  P 1  
years compounded  n
(129 )
monthly.  .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
 r
A  P1  
 $750 at 6.5% for 5 years
compounded annually
 n
15
 .065 
A  7501  . 
 1 
A  7501.065
5

A  1027.56
 Problem:  Answer:
nt
 r
A  P 1  
 $25,000 at 8% for 3 years  n
compounded annually
13
 .08 
A  250001  . 
 1 
A  250001.08
3

A  31492.80
 Problem:  Answer:
nt
 r
1. $680 at 5.5% for 1.5 years A  P 1  
compounded monthly  n
121.5
 .055 
A  6801  
 12 
A  738.34
 Problem:  Answer:
nt
 r
 $1500 at 4.5% for 2 years A  P 1  
compounded monthly  n
122
 .045 
A  15001  
 12 
A  1640.99
Look
how
compounding
works!
Homework

Assignment: Compound Interest Worksheet