Simple and Compound Interest
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Simple and Compound Interest
Simple Interest
• Interest is like “rent” on a loan. • You borrow money (principal).• You pay back all that you borrow plus more
(interest).• Interest is a percent (rate)of the amount
borrowed (principal).• Interest = principal x rate x time (in years)• Typically used in loans for new cars.
Example 1
• Find the simple interest paid annually for 2 years on $900 at 16% per year.
Example 2
• After 3 months the simple interest earned annually on an investment of $7000 was $63. Find the interest rate.
Compound Interest
• This is interest earned or paid on both the principal and previously earned interest.
• A is the final amount• P is the principal• r is the interest rate expressed as a decimal• n is the number of times the interest is
compounded• t is the time
nt
n
rPA )1(
$1500 is invested at a rate of 3.5% compounded annually for 4 years
Years Interest earned Amount in account
0 0 $1500
1 1500 x 0.035 x 1 $1552.50
2 1552.50 x 0.035 x 1 $1606.84
3 1606.84x0.035x1 $1663.08
4 1663.08x0.035x1 $1721.29
Example 3
• Find the amount in an account with $700 invested at a rate of 7.2% compounded quarterly for 2 years.
Example 4
• $28,000 invested at a rate of 4% compounded semi annually for 5 years.