Compound Interest

Problems

Lesson Objectives
Use

the compound interest formula to

solve problems
Simple interest I = P*r*t
nt
Compound interest
r

A P 1

Continuously

compounded interest

A = Pert
Well come back to Pert

The formulasCOPY!!
n = # times compounded /
year
r = rate
t = time (in years)
P= principal(initial \) amt.

Simple interest
I= (P*r*t)
Compound interest

r
A P 1
n

nt

Vocabulary
simple interest
principal
rate of interest
compound interest
***compounded continuously***

Applying Simple Interest

When you deposit money into a bank, the bank
pays you interest.
When you borrow money from a bank, you pay
interest to the bank.
Simple interest is
money paid only on
the principal.

I=P

Rate of interest is the

percent charged or
earned.

Principal is the amount of

money borrowed or invested.

Time that the money

is borrowed or
invested (in years).

Example 1: Finding Interest and Total Payment on a

Loan
To buy a car, Jessica borrowed $15,000 for 3
years at an annual simple interest rate of 9%.
How much interest will she pay if she pays the
entire loan off at the end of the third year?
What is the total amount that she will repay?
First, find the interest she will pay.
I=P

I = 15,000
I = 4050

Use the formula.

0.09

Substitute. Use 0.09 for 9%.

Solve for I.

Example 1 Continued
Jessica will pay $4050 in interest.
You can find the total amount A to be repaid on a
loan by adding the principal P to the interest I.
P+I=A
15,000 + 4050 = A
19,050 = A

principal + interest = total amount

Substitute.
Solve for A.

Jessica will repay a total of $19,050 on her loan.

You try! Example 2

To buy a laptop computer, Elaine borrowed
$2,000 for 3 years at an annual simple interest
rate of 5%. How much interest will she pay if
she pays the entire loan off at the end of the
third year? What is the total amount that she
will repay?
First, find the interest she will pay.
I=P

I = 2,000

I = 300

Use the formula.

0.05

Substitute. Use 0.05 for 5%.

Solve for I.

You try ! Example 2 Continued

Elaine will pay $300 in interest.
You can find the total amount A to be repaid on a
loan by adding the principal P to the interest I.
P+I=A
2000 + 300 = A
2300 = A

principal + interest = total amount

Substitute.
Solve for A.

Elaine will repay a total of $2300 on her loan.

Compound interest is interest paid not only on

the principal, but also on the interest that has
already been earned. The formula for compound
interest is below.
nt
r
n
A = P(1 + )

A is the final dollar value, P is the principal, r is

the rate of interest, t is the number of years,
and n is the number of compounding periods per
year.

COPY!
The table shows some common compounding
periods and how many times per year interest is
paid for them.
Compounding Periods

Times per year (n)

Annually

Semi-annually

Quarterly

Monthly

12

Examples 1-2
Suppose $10,000 is invested at 5.4%,
compounded monthly.
a) What is the balance after 2 yrs? 5 yrs?
0.054

A 10,000 1

12

10,0001.0045

$11,137.78

12*2

24

12*5

0.054

A 10,000 1

12

10,0001.0045

60

$13,091.71

Example 3: You Try!

David invested $1800 in a savings account
that pays 4.5% interest compounded semiannually. Find the value of the investment in
12 years.
Use the compound
r nt
A = P(1 + )
interest formula.
n
= 1800(1 +

0.045 2(12)

2
= 1800(1 + 0.0225)24
= 1800(1.0225)24
parentheses.

Substitute.
Simplify.
Add inside the

#3 Continued
1800(1.70576)

Find (1.0225)24 and round.

3,070.38

Multiply and round to the

nearest cent.

After 12 years, the investment will be worth about

$3,070.38.

Example 4- You try again.

I have $2,500 to invest and need $4,000 in 6
years. I found an account that pays 8% interest
(compounded daily)
A) At this rate, will I get my money?

0.08

A 2,500 1

365

$4,039.97

365*6

2,5001.000219

2190

4 CORNERS : Part I

Theresa invested $800 in a savings account that pays

4% interest compounded quarterly. Find the value of
the investment after 6 years.
A. $1156. 79
B.

$1015.79

C.

$1014.39

D.

$1015.85

STOP! HW

Example 4-5
Suppose $5,000 is invested at 6%, compounded
continuously.
a) What is the balance after 2 yrs? You try: 5 yrs?

A 5,000e

0.06*2

A 5,000e

0.06*5

5,0001.1275

5,0001.34986

$5,637.48

$6,749.29

Guided Practice. Example 7 YOU TRY!

Kia invested $3700 in a savings account that
pays 2.5% interest compounded quarterly. Find
the value of the investment in 10 years.
Use the compound
interest formula.

r nt
A = P(1 + )
n
= 3700(1 +

0.025 4(10)

4
= 3700(1 + 0.00625)40
= 3700(1.00625)40
parentheses.

Substitute.
Simplify.
Add inside the

Check It Out! Example 7 Continued

3700(1.28303)

Find (1.00625)40 and round.

4,747.20

Multiply and round to the

nearest cent.

After 10 years, the investment will be worth about

$4,747.20.

Ex.8
Suppose $10,000 is invested at 5.4%,
compounded monthly. Using Log/Ln to find t.
b) What is the doubling time?
0.054

20,000 10,000 1

12

12*n

2 1.0045

12 n

ln 2 12n ln 1.0045
ln 2
n
12.86 years
12 ln 1.0045

Ex.9 Suppose $5,000 is invested at 6%,

compounded continuously.

b) What is the doubling time?

10,000 5,000e

0.06* x

2e

0.06 x

ln 2 .06 x
ln 2
x
11.55 years
0.06

Ex.10 I have $2,500 to invest and need $4,000 in 6 years. I found an

account that pays 8% interest (compounded daily)
B) What is the minimum rate I need to guarantee reaching this value?

4000 2,500 1

365

2190

1.6 1.6

1
2190

365*6

x
1

365

x 0.07834 7.83%

x
1. 6 1

365

2190

x
1.000214637 1

365

Example 11
I want to retire with $1,000,000 in thirty
years. I can get a rate of 7%. How much
will I need to invest now if it is
compounded monthly?

0.07
1000000 x 1

12

12*30

1000000 x1.005833

x $123,205.86

360

Example 11 (contd)
You TryWhat about if Continuously?

1000000 xe

.07*30

1000000 xe
x $122,456.43

2.1