Compound Interest Essential Skill: Demonstrate Understanding of Concept

Compound Interest Compound Interest What is the difference between simple and compound interest? Simple Interest: Interest that is earned or paid only on the principal. Compound Interest Interest compounded annually means you find the interest after 
one year and add it to your principal In the second year, the interest becomes part of the principal Continue with this method for the amount of time you invest

Simple Interest: You deposit $50 in a saving account that earns 2% interest. After 3 years how much money is in the account? I=Prt   Compound Interest: You deposit $50 in a savings account that earns 2% interest annually. After 3 years how much money is in 
the account?

How could we find the balance at the end of each year without 
adding?  Multiply by 1.02 Try the same problem this way: Compound Interest: You deposit $50 in a savings 
account that earns 2% interest annually. After 3 years 
how much money is in the account?

Principal at start of year Balance at end of year Here is another way to look at the problem: Compound Interest: You deposit $50 in a savings account that earns 
2% interest annually. After 3 years how much money is in the account?    Principal at start of year  Balance at end of year Year 1 $50  A= 50(1+.02) A = $51 Year 2 $51  A = 51(1+.02) A = $52.02 Year 3 $52.02  A = 52.02(1 + .02) A = $53.06

Compound Interest When an account earns interest compounded annually, the 
balance A is given by the formula: A = P(1 + r)t Where P is the principal, r is the annual interest rate (written as a decimal), and t is the time in years. 1.) You deposit $1,500 into an account that earns 2.4% 
interest compounded annually. Find the balance after 6 
years.

Find the balance using both simple and compound interest for the following: 2.) Simple Compound P = $10,000 P = $10,000 r = 8.5% r = 8.5% compounded annually t = 3 years t = 3 years

Find both simple and compound interest for the following: 3.) Simple Compound P = $500 P = $500 r = 4.25% r = 4.25% compounded annually t = 25 years t = 25 years

Find both simple and compound interest for the following: 4.) Simple Compound P = $1,250 P = $1,250 r = 2% r = 2% compounded annually t = 5 years t = 5 years

What is the account compounds on a time frame shorter than a year? Challenge What is the account compounds on a time frame shorter than a year? A = P (1 + )nt where P = Principal, r = interest rate, t = time in years, and n = number of 
times per year interest is compounded You deposit $1000 into an account that earns 6% interest compounded 
semiannually. What is the balance after 4 years? r n

P = $3000, r = 6.2%, t = 7 years, compounded quarterly P = $500, r = 4%, t = 8 years, compounded monthly