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Compound Interest

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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.

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

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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

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

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

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

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

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

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

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

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

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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

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

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

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

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

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Look how compounding works!

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Homework Assignment: Compound Interest Worksheet

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