Simple and Compound Interest Simple Interest I = Prt Compound Interest A = P(1 + r)

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Presentation transcript:

Simple and Compound Interest Simple Interest I = Prt Compound Interest A = P(1 + r)

Simple Interest  I = prt; where p is principal, r is the rate and t is the time in years.  Interest – The amount earned or paid for the use of money.  Principal – The amount of money borrowed or deposited.  Simple Interest – The amount paid only on the principal  Annual Interest Rate – The percent of the principal earned or paid per year.

Examples 1. A $1000 bond earns 6% simple annual interest. What is the interest earned after 4 years? 2. Find the simple interest earned on $500 after 5 years in a money market account paying 5%.

Examples 1. Susan deposits $2000 into her savings account. What is her balance after she earns 7% simple interest for 6 years? 1. Find the unknown amount A = ? p = $1000 r = 2.5% t = 2 years

Compound Interest  The interest that is earned on both the principal and any interest that has been previously earned.  Formula A = p(1 + r) t  Example – You deposit $1200 into an account that earns 3.8% interst compounded annually. Find the balance after 5 years.

Examples 1. You deposit $1200 into an account that earns 3.8% interest compounded annually. Find the balance after 5 years. 2. Max borrows $3500 for a new car. The loan has 6.7% interest that will be compounded annually. How much money will he owe after 36 months?