3.5 Compound Interest Formula

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Presentation transcript:

3.5 Compound Interest Formula

Imagine you deposit $10,000 in a five-year cd. The account pays 5 Imagine you deposit $10,000 in a five-year cd. The account pays 5.2% interested compounded daily. How much will your $10,000 investment be worth by the end of the 5 years?

Compound Interest Formula B = ending balance p = principal r = interest rate n = number of compounds per year t = time (in years)

Number of Compounds Annually Semiannually Quarterly Daily n = 1 n = 2 n = 365 (or 366 in a leap year)

Marie deposits $1,650 for three years at 3% interest, compounded daily Marie deposits $1,650 for three years at 3% interest, compounded daily. What is her ending balance? p = $1,650 r = 0.03 n = 365 t = 3

Kate deposits $2,350 in an account that earns interest at a rate of 3 Kate deposits $2,350 in an account that earns interest at a rate of 3.1%, compounded monthly. What is her ending balance after 5 years? p = $2,350 r = 0.031 n = 12 t = 5

3.5 Compound Interest Formula

APR vs. APY APR APY Annual interest rate Actual rate you earn with compounding interest To find APY:

Sharon deposits $8,000 in a one year CD at 3 Sharon deposits $8,000 in a one year CD at 3.2% interest, compounded daily. What is Sharon’s APY?

Barbara deposits $3,000 in a one year CD at 4 Barbara deposits $3,000 in a one year CD at 4.1% interest, compounded daily. What is her APY for the account?