8.4 Simple and Compound Interest

CH 8, section 8.46120--1068.4 Simple and Compound InterestSimple InterestI=PRTInterest = Principal x Rate x Time calculate annually paid on average balance (principal)Ex. Deposit of $100 at 6%

P= $100R= 6%T= 1 yearI= 100 x .06 x 1= $6

Try a coupleYou deposit $100 at 12% for 1 year

You deposit $500 at 3.25% for 2 years

You deposit $100 at 8% for 6 months(note a month is considered 1/12 of a year)

Compound InterestWhen you earn interest on both the principal (ie. Your initial deposit) and the interest.EX. After earning $6 in interest on your $100 investment, you allow that money to remain invested, making your principal for the following year $106.

Types of compoundingCan be done AnnuallySemi annuallyQuarterlyMonthlyDaily

Note: the more often your money compounds, the more interest you earn.

Examples for compound interestRefer to pages 274-275 of your Economic Education for Consumers book to review samples of compound interestRule of 72Tells you how long it will take an investment to double in value.

EX. At 10%, it will take my investment 7.2 years to double in value.72/10= 7.2