7.2 Compound Interest and Exponential Growth ©2001 by R. Villar All Rights Reserved

Compound Interest and Exponential Growth Simple Interest: the amount paid or earned for the use of money for a unit of time. Compound Interest: Interest paid on the original principal and on interest that becomes part of the account. Compound Interest Formula: A is the balance in the account after t years P is the principal (amount deposited) N is the number of compounding periods per year r is the interest rate

Example: You deposit $10,000 in an account that pays 5% annual interest compounded quarterly. What is the balance after 10 years? A ≈ $16,440 This is an example of exponential growth. Let’s look at the graph of this problem which will demonstrate exponential growth...

Exponential Growth: Time (Years) Balance (1000 dollars)

Exponential Growth: Exponential Growth and Decay Modely = Ca x Let a and C be real numbers, with C > 0, Notice that this quantity is greater than 1. If it was less than 1, the graph would reflect Exponential Decay. If a > 1, the model is exponential growth If a < 1, the model is exponential decay