Compound Interest Finance

Unit Learning Goals  Compare simple and compound interest, relate compound interest to exponential growth, and solve problems involving compound interest

How will I know I understand the material?  Can you explain how compound interest differs from simple interest?  Did you complete all the worksheets handed out?  Can you teach the concept to a friend?

Key Words  Compounding Periods – the number of times your total amount has interest calculated on it  Annually : once a year  Semi – Annually: twice a year (2)  Quarterly : four times a year (4)  Monthly : once per month (12)  Bi – Weekly : once every two weeks (26)  Weekly: once a week (52)  Daily : once a day (365)

What is Compound Interest?  In simple interest, interest was only accumulated on the original principle  Compound interest is accumulated on the principle plus any interest that has been made  Awesome if you are saving money, terrible if you are lending money

Example In a savings account you earn 5% compound interest on your investment of $1000. If you keep it there for 5 years how much will you earn? Work together with your group. YearPrincipleEarned InterestTotal 1$ (0.05)=$50$ $50 =$1050 2$1050$1050(0.05) = $52.50 $ $52.50 = $ $ $55.13$ $57.88$ $60.78$

Let’s Graph It  What is the significance of the amount at year zero?  What is the significance of the slope(s)?  What kind of relationship is this? Not sure, but that sure isn’t linear… It is the principle It is not constant. It increases between points, just like the interest accumulated.

Let’s Compare Simple and Compound Interest  Notice the amount with compound interest sneaks above the amount with simple interest Compound interest is higher than simple interest

Example  You have placed $500 in a bank account that pays 6% quarterly for 5 years. What is the final amount?  P = $500  i = 0.06  N = 5 x 4 = 20 (number of times it gains interest)

Example Continued Your investment did well!