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
1 year
2 years
3 years
4 years
5 years
10 years
20 years
50 years
Simple Interest
110
120
130
140
150
200
300
600
Compound
Interest
110
121
133
146
161
259
672
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:
 r
A  p 1  
 n
nt
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:
$500 invested at
12% for 10 years
compounded
yearly.

Answer:
 r
A  P 1  
 n
nt
110
 .12 
A  5001 

1 

A  5001.12
10
A  1552.93
Example……

$1000 at 7.25% for 9 years
compounded monthly.
Answer……


Problem:
$1000 at 7.25%
for 9 years
compounded
monthly.

Answer:
 r
A  P 1  
 n
nt
 .0725 
A  10001 

12 

A  1916.57
(129 )
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:
$750 at 6.5% for 5
years compounded
annually

Answer:
 r
A  P 1  
 n
nt
15
.065 

A  7501  .

1 

A  7501.065
5
A  1027.56


Problem:
$25,000 at 8% for 3
years compounded
annually

Answer:
 r
A  P 1  
 n
nt
13
.08 

A  250001  . 
1 

A  250001.08
3
A  31492.80

1.
Problem:
$680 at 5.5% for 1.5
years compounded
monthly

Answer:
 r
A  P 1  
 n
nt
121.5
 .055 
A  6801 

12 

A  738.34


Problem:
$1500 at 4.5% for 2
years compounded
monthly

Answer:
 r
A  P 1  
 n
nt
122
 .045 
A  15001 

12 

A  1640.99
Look
how
compounding
works!
Homework
Assignment: Compound Interest
Worksheet