1. Economics

2.  Interest can mean two things to the consumer…  If you put money in a bank, you will get paid interest on your deposit over time.  If you borrow money from a bank (home or auto loan, credit card) you pay interest to the bank.

3.  You deposit $100 into a savings account….this is known as your principal (Mr. Evans is also your principal but that’s a different story…)  The bank pays you interest on your deposit. Usually somewhere between 1% and %5, but may be more depending on the type of account.  So if you deposit $100 at 5% interest, you will have $105 by the end of the year.

4.  Paid once a year  Based on the average balance in a savings account  Suppose you deposit $100 at 6%.  End of year 1: $100 x.06= $6.00 + $100= $106

5.  Compound interest is interest paid on the principal and previously earned interest.  Interest can be compounded annually, semi- annually, quarterly, monthly, or daily.  The more often it is compounded, the more $ is earned.  End of year 1: $100 x.06= $6.00 + $100= $106  End of year 2: $106 x.06= $6.36 + $106= $112.3  End of year 3: $112.36 x.06= $6.74 + $112.36= $119.1  End of year 4: $119.10 x.06= $7.15 + $119.10= $126.25