Interest

How simple and compound interest are calculated Simple interest calculation I = PRT (Interest = Principal x Rate x Time) Dollar Amount x Interest rate x Length of Time (in years) = Amount Earned Example If you had $100 in a savings account that paid 6% simple interest, during the first year you would earn $6 in interest. $100 x 0.06 x 1 = $6 At the end of two years you would have earned $12. The account would continue to grow at a rate of $6 per year, despite the accumulated interest. Teens – Lesson 12 - Slide 12-E

How simple and compound interest are calculated Compound interest calculation Interest is paid on original amount of deposit, plus any interest earned. (Original $ Amount + Earned Interest) x Interest Rate x Length of Time = Amount Earned FV=PV (1+r/m)^nt FV=Future Value PV=Present Value R=annual rate of return in decimal N=Number of times per year compounded T=Number of years invested Example If you had $100 in a savings account that paid 6% interest compounded annually, the first year you would earn $6.00 in interest. $100 x 0.06 x 1 = $6 $100 + $6 = $106 With compound interest, the second year you would earn $6.36 in interest. The calculation the second year would look like this: $106 x 0.06 x 1 = $6.36 $ = $112.36

How much simple interest can you earn on a $500-savings account at a rate of 5 1/2% for 9 months I = PRT I = 500 x 5 1/2 % x 9 months I = 500 x.055 x ¾ (9 out of 12 months 9/12 = ¾) (.75) I = 500 x.055 x.75 = $20.63

Calculate the value of a $2,000 CD offering 6% that’s compounded quarterly at the end of the year Note: To compound the interest quarterly, a new balance must be used at the beginning of each quarter. 1st quarter: $2,000 + ($2,000 x 6% x year) = $2,000 + ($2,000 x 0.06 x 0.25) = $2,030 2nd quarter: $2,030 + (2,030 x 0.06 x 0.25)= $2, rd quarter: $2, ($2, x 0.06 x 0.25)= $2, th quarter: $2, ($2, x 0.06 x 0.25)= $2, Final Balance: $2, Interest Earned: $122.73

the rule of 72 Teens – Lesson 12 - Slide 12-H How many years will it take to double my money? 72 DIVIDED BY = YEARS TO DOUBLE A SUM OF MONEY INTEREST RATE At what interest rate will my money double in a set number of years? 72 DIVIDED BY = INTEREST RATE REQUIRED YEARS TO DOUBLE A SUM OF MONEY