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Published byCristopher Eason Modified over 2 years ago

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SIMPLE AND COMPOUND INTEREST Since this section involves what can happen to your money, it should be of INTEREST to you!

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Annual interest rate IMPLE INTEREST FORMULA Interest paid Principal (Amount of money invested or borrowed) Time (in years) 100 I = PRT

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If you invested $ in an account that paid simple interest, find how long you’d need to leave it in at 4% interest to make $ = (200)(0.04)T 1.25 yrs = T Typically interest is NOT simple interest but is paid semi- annually (twice a year), quarterly (4 times per year), monthly (12 times per year), or even daily (365 times per year). enter in formula as a decimal I = PRT 100

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COMPOUND INTEREST FORMULA amount at the end Principal (amount at start) annual interest rate (as a decimal) time (in years) number of times per year that interest in compounded

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(2) Effective rate of interest is the equivalent annual simple rate of interest that would yield the same amount as that made compounding. This is found by finding the interest made when compounded and subbing that in the simple interest formula and solving for rate. Find the effective rate of interest for the problem above. The interest made was $ Use the simple interest formula and solve for r to get the effective rate of interest. I = Prt 85.83=(500)r(2) r = = 8.583% Find the amount that results from $500 invested at 8% compounded quarterly after a period of 2 years.

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Acknowledgement I wish to thank Shawna Haider from Salt Lake Community College, Utah USA for her hard work in creating this PowerPoint. Shawna has kindly given permission for this resource to be downloaded from and for it to be modified to suit the Western Australian Mathematics Curriculum.www.mathxtc.com Stephen Corcoran Head of Mathematics St Stephen’s School – Carramar

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