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Compound Interest. homework Worksheet: Compound Interests.

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Presentation on theme: "Compound Interest. homework Worksheet: Compound Interests."— Presentation transcript:

1 Compound Interest

2 homework Worksheet: Compound Interests

3 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.

4 How it works. Simple interest is interest on the principle amount. Compound interest is when your principle and any earned interest both earn interest.

5 Consider this example: You begin with $100 invested at 10% annual interest. AfterSimple InterestCompound Interest 1 year110 2 years120121 3 years130133 4 years140146 5 years150161 10 years200259 20 years300672 50 years60011,739

6 Compound Interest Wins!! From this example, it is easy to see that if you are saving money, you would prefer compound interest.

7 Convert Percent into Decimals 56.35% 0.034% 7.8% 1%

8 P is the principal amount (starting amount) r is the annual interest rate m is the number of times interest is compounded per year t is the number of years

9 Calculate compound interest using this formula: A—Total amount p —principle r —interest rate n —number of compounding periods t —time in years

10 Compounding Period Annually  m=1 Semiannually  m=2 Quarterly  m=4 Daily  m=365

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13 Example 2: Find the final amount of a $100 investment after 10 years at 5% interest compounded annually, quarterly, and daily. Compounding period mFinal amount Annually Quarterly Daily

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15 Example 3: Find the final amount of a $2000 certificate of deposit (CD) after 5 years at an annual interest rate of 5.51% compounded annually? Compounding period mFinal amount

16 Calculate compound interest using this formula: A—Total amount p —principle r —interest rate n —number of compounding periods t —time in years

17 Example: $100 is invested at 10% interest compounded yearly for 6 years 177.16

18 $250 invested at 6.5% for 8 years compounded monthly. 419.92

19 Example…… $500 invested at 12% for 10 years compounded yearly.

20 Answer…… Problem: $500 invested at 12% for 10 years compounded yearly. Answer:

21 Example…… $1000 at 7.25% for 9 years compounded monthly.

22 Answer…… Problem: $1000 at 7.25% for 9 years compounded monthly. Answer:

23 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

24 Problem: $750 at 6.5% for 5 years compounded annually Answer:

25 Problem: $25,000 at 8% for 3 years compounded annually Answer:

26 Problem: 1.$680 at 5.5% for 1.5 years compounded monthly Answer:

27 Problem: $1500 at 4.5% for 2 years compounded monthly Answer:


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