7-7 Simple and Compound Interest. Definitions Left side Principal Interest Interest rate Simple interest Right side When you first deposit money Money.

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Presentation transcript:

7-7 Simple and Compound Interest

Definitions Left side Principal Interest Interest rate Simple interest Right side When you first deposit money Money the bank pays you (free money) Percentage of the balance that an account earns in a fixed period of time Interest paid only on the principal

Compound interest Balance When bank pays interest on the principal and on the interest an account has earned The principal plus the interest

I = prt I = interest (how much free money you earn) P = principal (amount you invest, deposit, start out with) R = rate (change to a decimal) T = time (yrs)

1. Find simple interest Suppose you deposit $500 into a savings account. The interest rate is 4% per year. – Find simple interest earned in 6 years – Find total principal plus interest I = prt – – I = 120 Total = = 620

Solve on your own… Find simple interest – Principal =$250 – Rate = 4% – Time = 3 yrs Find simple interest – Principal = $250 – Rate = 3.5% – Time = 6 months

2. Use a table to find compound interest You deposit $400 that earns 5% interest compounded annually. What is balance after 4 years? Principal at beginning InterestBalance Year 1: $ x.05 = $20 $400 + $20 =$420 Year 2: Year 3: Year 4:

Compound interest formula B = p(1 + r)ⁿ B= balance P= principal R= rate N =years and interest periods Principal = $1000 Rate 4% Time = semiannually for 2 years B = 1000(1 +.04)⁴ B =

Homework Textbook p. 380 ( 1-43 even) Test on Friday!