Compound Interest

homework Worksheet: Compound Interests

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.

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

Consider this example: You begin with $100 invested at 10% annual interest. AfterSimple InterestCompound Interest 1 year110 2 years years years years years years years60011,739

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

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

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

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

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

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

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

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

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

$250 invested at 6.5% for 8 years compounded monthly

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

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

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

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

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

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

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

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

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