1. 8.4 Simple and Compound Interest
CH 8, section 8.4

2. Simple Interest I=PRT paid on average balance (principal)
Interest = Principal x Rate x Time
calculate annually
paid on average balance (principal)
Ex. Deposit of $100 at 6%
P= $100
R= 6%
T= 1 year
I= 100 x .06 x 1= $6

3. Try a couple… You deposit $100 at 12% for 1 year
You deposit $500 at 3.25% for 2 years
You deposit $100 at 8% for 6 months
(note a month is considered 1/12 of a year)

4. Compound Interest
When you earn interest on both the principal (ie. Your initial deposit) and the interest.
EX. After earning $6 in interest on your $100 investment, you allow that money to remain invested, making your principal for the following year $106.

5. Types of compounding Can be done Annually Semi annually Quarterly
Monthly
Daily
Note: the more often your money compounds, the more interest you earn.

6. Examples for compound interest
Refer to pages of your Economic Education for Consumers book to review samples of compound interest

7. Rule of 72
Tells you how long it will take an investment to double in value.
EX. At 10%, it will take my investment 7.2 years to double in value.
72/10= 7.2