Day 86 – Introduce the power of interest

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Presentation transcript:

Day 86 – Introduce the power of interest

Vocabulary Interest: The amount of money that you pay to borrow money or the amount of money that you earn on a deposit Annual Interest Rate: The percent of interest that you pay for money borrowed, or earn for money deposited. Simple interest formula: I = Prt where I is the interest earned, P is the principal or the amount of money that you start out with, r is the annual interest rate as a decimal, and t is the time in years. Balance: The sum of the principal P and the interest Prt.

Computing Simple Interest Earned Example 1 Computing Simple Interest Earned Dianna deposits $725 into a savings account that pays 2.3% simple annual interest. How much interest will Dianna earn after 18 months?

Solution In the simple interest formula, time is measured in years. Write 18 months as , or 1.5 years. Write the annual interest rate as a decimal. ANSWER Diana will earn $25.01 in interest

Example 2 FINDING THE BALANCE You deposit $300 in a savings account that pays 4% simple annual interest. Find your account balance after 9 months.

Solution Write 9 months year , or 0.75 year. ANSWER Your account balance after 9 months is $309

Vocabulary Compound interest: Interest that is earned on both the principal and any interest that has been earned previously. Compound interest formula: A = P(1 + r)t where A represents the amount of money in the account at the end of the time period, P is the principal, r is the annual interest rate, and t is the time in years. Balance: The sum of the principal and the interest

Computing Compound Interest using Simple Interest Example 1 Computing Compound Interest using Simple Interest Simon deposits $400 in an account that pays 3% interest compounded annually. What is the balance of Simon’s account at the end of 2 years?

Solution Step 1 Find the balance at the end of the first year. The balance at the end of the first year is $412.

Solution Step 2 Find the balance at the end of the second year. ANSWER Simon has $424.36 in his account after 2 years

Computing Compound Interest using the Compound Interest Formula Example 2 Computing Compound Interest using the Compound Interest Formula Jackie deposits $325 in an account that pays 4.1% interest compounded annually. How much money will Jackie have in her account after 3 years?

Solution ANSWER Jackie will have $366.64 in here account after 3 years