Lesson 5 - Compound Interest.ppt

Does anyone have any interest in
interest?
Very few banks today pay interest
based on the simple interest
formula. Instead, they pay interest
by using a principle called
compounding.
The difference between simple and
compound interest is this: Simple
interest grows slowly, compounding
speeds up the process.

How it works.
Simple interest is interest on the
principle amount.
Compound interest is when your
principle and any earned interest
both earn interest.

Consider this example: You begin with
$100 invested at 10% annual interest.
After Simple Interest Compound
Interest
1 year 110 110
2 years 120 121
3 years 130 133
4 years 140 146
5 years 150 161
10 years 200 259
20 years 300 672
50 years 600 11,739

Compound Interest Wins!!
From this example, it is easy to see
that if you are saving money, you
would prefer compound interest.

Calculate compound interest using this
formula:
A—Total amount
p —principle
r —interest rate
n —number of compounding periods
t —time in years
nt
n
r
p
A 






 1

Example: $100 is invested at 10%
interest compounded yearly for 6 years
177.16

$250 invested at 6.5% for 8 years
compounded monthly.
419.92

Example……
 $500 invested at 12% for 10 years
compounded yearly.

Answer……
 Problem:
 $500 invested at
12% for 10 years
compounded
yearly.
 Answer:
 
93
.
1552
12
.
1
500
1
12
.
1
500
1
10
10
1



















A
A
A
n
r
P
A
nt

Example……
 $1000 at 7.25% for 9 years
compounded monthly.

Answer……
 Problem:
 $1000 at 7.25%
for 9 years
compounded
monthly.
 Answer:
57
.
1916
12
0725
.
1
1000
1
)
9
12
(


















A
A
n
r
P
A
nt

Try these:
1. $750 at 6.5% for 5 years compounded
annually
2. $25,000 at 8% for 3 years compounded
annually
3. $680 at 5.5% for 1.5 years compounded
monthly
4. $1500 at 4.5% for 2 years compounded
monthly

 Problem:
 $750 at 6.5% for 5
years compounded
annually
 Answer:
 
56
.
1027
065
.
1
750
1
065
.
.
1
750
1
5
5
1



















A
A
A
n
r
P
A
nt

 Problem:
 $25,000 at 8% for 3
years compounded
annually
 Answer:
 
80
.
31492
08
.
1
25000
1
08
.
.
1
25000
1
3
3
1



















A
A
A
n
r
P
A
nt

 Problem:
1. $680 at 5.5% for 1.5
years compounded
monthly
 Answer:
34
.
738
12
055
.
1
680
1
5
.
1
12


















A
A
n
r
P
A
nt

 Problem:
 $1500 at 4.5% for 2
years compounded
monthly
 Answer:
99
.
1640
12
045
.
1
1500
1
2
12


















A
A
n
r
P
A
nt

Homework
Assignment: Compound Interest
Worksheet

Lesson 5 - Compound Interest.ppt

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