1. Starter
What is the difference between simple and compound interest?

2. Compounding Interest More than Once a Year
Day 2

3. Compounding Annually Accrues (gains) interest once during the year.

4. Compounding Quarterly
Accrues interest 4 times during the year.
n = 4

5. Compounding Monthly
Accrues interest 12 times during the year.
n = 12

6. Compounding Daily
Accrues interest 365 times during the year.
n = 365

7. Compound Interest Formula for Interest Paid n Times Per Year
𝐀=𝐏 𝟏+ 𝐀𝐏𝐑 𝐧 (𝐧𝐘)
A – Accumulated Balance
P – Principal
APR – Annual Percentage Rate
n – Number of times you compound in a year
Y – Time in years

8. Example 1
You deposit $5000 in a bank account that pays an APR of 3% and compounds interest monthly.
How much money will you have after 5 years?
Compare part ‘a’ to an account with interest compounded annually.

9. Example 2
You deposit $12,000 in a bank account that pays an APR of 2.5% and compounds interest quarterly.
How much money will you have after 25 years?
Compare part ‘a’ to an account with interest compounded daily.

10. Planning Ahead with Compound Interest
Suppose you have a baby and want to make sure that you’ll have $100,000 for his or her college education. Assuming your baby will start college in 18 years, how much money should you deposit now?
If you know the interest rate this problem is simply a “backwards” compound interest problem.

11. Start with the Compound Interest Formula…
𝐀=𝐏 𝟏+ 𝐀𝐏𝐑 𝐧 (𝐧𝐘)

12. Example 3
Using the numbers from above. Suppose you put money in an investment with an APR of 3%, compounded monthly, and leave it there for the next 18 years. How much would you have to deposit now?

13. Example 4
Repeat example 3, but with monthly compounding and an interest rate of 5%.
Compare the results. Which option is a better choice?