1. Simple & Compound Interest

2. Simple & Compound Interest
Objective:
Develop and use ratios, proportions, and percents to solve problems
Essential Question:
How can I use percents to calculate simple and compound interest?

3. Simple & Compound Interest
Vocabulary:
Interest: an specified amount of money paid or earned for the use of money.
Principal: the original amount of money borrowed or deposited.
Rate: the interest percentage.
Time: the period of time for which an amount of money is invested or borrowed.
Simple Interest: an interest calculation that is calculated only on the principal.
Compound Interest: an interest calculation that is calculated using the principal and any interest remaining in an account.

4. Real World Example: Simple & Compound Interest I = Prt
Simon is 12 years old and has decided that he wants to buy a car when he turns 16. He has some money and thinks if he puts it in the bank for the next four years he will get enough interest to buy a car. If he invests $3000 and receives 4% simple interest over the next four years, how much will he have to spend on a new car?
I = Prt
I = (3000)(0.04)(4)
I = $480
Simon will have a total of $3,480 to spend on a car when he turns 16

5. Simple & Compound Interest Simple Interest Formula
I = Prt
Time (in years)
Interest
Rate
Principal

6. Simple & Compound Interest Compound Interest Formula
B = P(1 + )nt r n
Time (in years)
Balance
Rate
Principal

7. Simple & Compound Interest
Example 1: Finding Simple Interest
Find the simple interest for $4,000 invested for 4 years at an annual interest rate of 4%.
I = Prt
I = ?
I = (4000)(0.04)(4)
P =
4,000
I = $640
r =
4% = 0.04
$4,000 + $640
t =
4 years
$4,640.00

8. Simple & Compound Interest
Example 2: Finding Compound Interest
If you deposit $4,000 in an account that pays 4% compounded annually what is your balance after 4 years.
B = p(1 + r)t
B = ?
B = 4000( )4
p =
4,000
B = $
r =
4% = 0.04
t =
4 years
$4,679.43

9. Simple & Compound Interest
Example 3: Finding Simple Interest
Find the simple interest for $2,500 invested for 4½ years at an interest rate of 4.5%.
I = Prt
I = ?
I = (2500)(0.045)(4.5)
P =
2,500
I = $506.25
r =
4.5% = 0.045
$2,500 + $506.25
t =
4.5
$3,006.25

10. Simple & Compound Interest
Example 4: Finding Simple Interest
Find the simple interest for $80 invested for 6 months earning 6% simple interest.
I = Prt
I = ?
I = (80)(0.06)(6/12)
P = 80
I = $2.40
r =
6% = 0.06
$ $2.40
t =
6/12 = 0.5
$82.40

11. Simple & Compound Interest
Example 5: Using Simple Interest to Find Time
If you invest $8,000 and receive 9% simple interest, how long would it take to earn $5,040 in interest.
I = Prt
I =
5,040
5040 = (8000)(0.09)(t)
P =
8,000
5040 = 720t
r =
9% = 0.09
t = ?
t = 7 years

12. Simple & Compound Interest
Example 6: Using Simple Interest to Find Rate
If you invest $8,000 and receive $5040 in simple interest after 7 years, what was the interest rate.
I = Prt
I =
5,040
5040 = (8000)(r)(7)
P =
8,000
5040 = 56000r
r = ?
t = 7
r = 0.09

13. Simple & Compound Interest
When Calculating Interest:
Always Remember…
First make sure you are using the correct formula…is it simple interest or compound interest?
Make the correct substitutions…p is principal, r is interest rate, t is time in years, and B is balance.
Solve for the unknown.
Reread the question and calculate your answer.

14. Simple & Compound Interest
Independent Practice:
Find the interest for each example below:
1. $800, 5 years, 5% interest
2. $1,500, 6½ years, 8% interest
3. $450, 7 years, 11.75% interest
= $200.00
= $780.00
= $370.13

15. Simple & Compound Interest
Independent Practice:
Find the interest for each example below:
1. $800, 5 years, 5% interest
2. $1,500, 6½ years, 8% interest
3. $450, 7 years, 11.75% interest
= $200.00
= $780.00
= $370.13

16. Simple & Compound Interest
HOMEWORK