Compound Interest

Simple Interest Principal Rate Interest total 100 .05 5.00 105.00 110.00 115.00 120.00 125.00 Simple interest – Interest is JUST calculated on the principal (initial deposit) each month.

Compound Interest With compound interest, the original principal is added with the interest for the next year and interested is calculated based on the principal AND interest

Compound Interest Principal Rate Interest Total 100 .05 5.00 105.00 5.25 110.25 5.51 115.76 5.78 121.54 6.08 127.62 Principal Rate Interest total 100 .05 5.00 105.00 110.00 115.00 120.00 125.00

Video – simple vs. compound interest https://www.youtube.com/watch?v=I6ZOc9qzyYk

Formulas Simple Interest: I = prt Compound Interest: A= P(1+r)t

Simple vs. Compound I = prt A=P(1+r)t Principal: $1,200 Rate: 4% Time: 5 years Simple Interest: I = 1200 x .04 x 5 $240 total in the bank = 1200 + $240 = $1440 Compound Interest: A = 1200(1+.04)5 1200(1.04)5 1200(1.2166529) A = $1459.98

William borrows money to buy a $9,000 car William borrows money to buy a $9,000 car. The interest rate on the loan is 4.5%, compounded annually. The loan is for 3 years. How much does William owe in total? A=P(1+r)t A = 9000(1+.045)3 9000(1.045)3 9000(1.1411661) $10,270.50 Remember! (1.045)3 = 1.045 x 1.045 x 1.045