1. calculating simple interest
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1. Calculating Simple Interest. A dollar today is worth more than a dollar tomorrow Because of this cost, money earns interest over time If you are borrowing, you will pay interest If you are lending/investing, you will earn interest Simple Interest - PowerPoint PPT PresentationTRANSCRIPT
Calculating Interest and Exponential Growth
1. Calculating Simple Interest
• A dollar today is worth more than a dollar tomorrow
• Because of this cost, money earns interest over time
• If you are borrowing, you will pay interest
• If you are lending/investing, you will earn interest
• Simple Interest
• interest on an investment that is calculated once per period, usually annually
• on the amount of the capital alone
• interest that is not compounded
Calculating Interest and Exponential Growth
1. Calculating Simple Interest
• Principal is the initial amount invested or borrowed (the loan amount or how much you save)
• Simple Interest Formula:
• P = Principal
• r = Annual Interest Rate
• t = Number of periods (usually years) the money is being borrowed
• Simple Interest = Principal times interest times years
• Simple Interest = P(r)(t)
• Total Owed = P + P(r)(t)
Calculating Interest and Exponential Growth
1. Calculating Simple Interest
• Ex 1:
Mr. Vasu invests $5,000. His annual interest rate is 4.5% and he invests his money for 5 years. What is the total in his account after this time?
• P =
• r =
• t =
• Total = P + P(r)(t)
$5,000
0.0455
5000 + 5000(0.045)(5)
5000 + 1125 = $6,125
Calculating Interest and Exponential Growth
1. Calculating Simple Interest
• Ex 2: Trayvond saves $10,000 to pay for a car. His earns 6% on his investment and invests his money for 7 years. What is the total in his account after this time?
• P =
• r =
• t =
• Total = P + P(r)(t)
$10,000
0.067
10000 + 10000(0.06)(7)
10000 + 4200 = $14,200
Calculating Interest and Exponential Growth
2. Calculating Compound Interest
• Constant Multiplication Factor and Interest Rate
• The constant multiplication factor = (1 + r)
• r = annual interest rate (as a decimal)
• Annual interest rate and growth rate are the same thing
• Ex 1: If you earn 6%, what is the constant multiplication factor: (1 + 0.06) = (1.06)
• Ex 2: If the CMF is 1.5, what is the growth rate?
1.5 = 1 + r; r=0.50, which is 50%
Calculating Interest and Exponential Growth
2. Calculating Compound Interest
• Ex 3: Mr. Vasu invests $10,000 in an account that earns 6% annual interest that compounds annually. How much will he have in 2 years:
Year 0 Year 1 Year 2
$10,000
10,000(1.06)
= 10,600
10,600(1.06)
= $11,236
Mr. Vasu has $11,236 after two years.
Calculating Interest and Exponential Growth
2. Calculating Compound Interest
• Ex 3: Mr. Vasu invests $10,000 in an account that earns 6% annual interest that compounds annually. How much will he have in 2 years:
Year 0 Year 1 Year 2
$10,000
10,000(1.06)
= 10,600
10,600 (1.06)
= $11,236
$10,000 10,000(1.06)
=10,000(1.06)1
=10,600
10,000(1.06)(1.06)
=10,000(1.06)2
=11,236
• Ex 4: Mr. Vasu invests $10,000 in an account that earns 6% annual interest that compounds annually. How much will he have in 7 years?
10,000(1.06)7 = $15,036.30Mr. Vasu has $15,036.30 after seven years.
Calculating Interest and Exponential Growth
2. Calculating Compound Interest
• Compound Interest Formula
(Exponential Growth Function)
A = P(1 + r)t
A = Future Value or Final/Ending Value
P = Principal/Initial Value and Y-Intercept
r = Annual Interest Rate/Growth Rate
t = Years
Calculating Interest and Exponential Growth
2. Calculating Compound Interest
• Ex 5: Aaliyah invests $6,000 and earns 5% per year.
• Write an exponential growth equation for how much money Aaliyah has after t years?
A = ?P = 6,000r = 0.05t = ?
A = 6000(1.05)t
• How much will she have after six years if interest is compounded annually?
t = 6 years
A = 6000(1.05)6
A = $8,040.57
Calculating Interest and Exponential Growth
2. Calculating Compound Interest
• Ex 6: Ganiu invests $24,000 for ten years at 4.5%.
• How much does he have in his account after the ten years?
A = ?P = 24,000r = 0.045t = 10
A = 24000(1.045)10
A = $37,271.27Ganiu has $37,271.27 after 10 years.
• How much did he earn in interest alone?
$37,271.27 – 24,000 =
Ganiu earned $13,271.27 in interest.
Calculating Interest and Exponential Growth
3. Analyzing
Compound Interest Formula
• Ex 7: The following function represents how much money Lashawn has in her account after t years:A(t) = 6,500(1.17)t
• What is the y-intercept?
The coefficient is 6,500, so the y-intercept is 6,500.
• What is the constant multiplication factor?
The base is 1.17, so the CMF is 1.17.
• How much money does Lashawn invest at the beginning into her account?
The y-intercept is where t=0, the initial value. So, she started with $6,500.
• What is the annual interest rate?
CMF = (1+r) = 1.17, so r = 0.17 or 17%
• How much Lashawn have after twelve years?
A(t) = 6,500(1.17)12 = $42,770.44.
Calculating Interest and Exponential Growth
3. Analyzing
Compound Interest Formula
• Ex 8: The following function represents the number people living the Chinese city of Kunming:
C(t) = 50,000(2)t
• What is the y-intercept?
Coefficient is 50,000, so the y-intercept is 50,000.
• What is the constant multiplication factor?
The base is 2, so the CMF is 2.
• How many people were initially in Kunming?
The y-intercept is where t=0, the initial value. So, the initial population was 50,000 people.
• What is the annual growth rate in population?
CMF = (1+r) = 2, so r = 1 or 100% growth
• How many people in Kunming after 10 years?
C(t) = 50,000(2)10 = 51,200,000 people
Calculating Interest and Exponential Growth
4. Calculating Compound Interest
w Periodic Compounding
Semiannual
Quarterly
Monthly
Daily
• Compound Interest Formula
with Periodic Compounding
A = P(1 + r/n)nt
A = Future Value or Final/Ending Value
:
P = Principal/Initial Value and Y-Intercept
r = Annual Interest Rate/Growth Rate
t = Years
n = Periods per Year (1, 2, 4, 12, 365)
Calculating Interest and Exponential Growth
• Ex 9: Henok invests $6,000 and earns 5% per year. How much will he have after six years
A(t) = 6000(1 + .05/n)6n • if interest is compounded annually (n=1)?
A = 6000(1.05)6
A = $8,040.57
• if interest is compounded semi-annually (n=2)?
A = 6000(1 + 0.05/2)(2●6)
A = 6000(1.025)12
A = $8,069.33
• if interest is compounded quarterly (n=4)?
A = 6000(1 + 0.05/4)(4●6)
A = 6000(1.0125)24
A = $8,084.11
4. Calculating Compound Interest
w Periodic Compounding
Semiannual
Quarterly
Monthly
Daily
Calculating Interest and Exponential Growth
• Ex 9: Henok invests $6,000 and earns 5% per year. How much will he have after six years
A(t) = 6000(1 + .05/n)6n • if interest is compounded monthly (n=12)?
A = 6000(1 + 0.05/12)(12*6)
A = $8,094.11
• if interest is compounded daily (n=365)?
A = 6000(1 + 0.05/365)(365●6)
A = $8,098.99
4. Calculating Compound Interest
w Periodic Compounding
Semiannual
Quarterly
Monthly
Daily
Annually Semi-Annually
Quarterly Monthly Daily
n = 1 n = 2 n = 4 n = 12 n = 365
$8,040.57 $8,069.33 $8,084.11 $8,094.11 $8,098.99
Henok’s investment gets bigger if interest compounds more frequently
Calculating Interest and Exponential Growth
Ex 10: Homer invests $1,000 at 10% for nine years
P = 1,000 r = 0.10 t = 95. Simple vs. Compound Interest
Linear vs. Exponential Functions
Simple Interest
Asimple = P + Prt
A = 1000 + 1000(0.10)(9)
Asimple = $1,900
Year A(t)
0 1,000
1 1,100
2 1,200
3 1,300
4 1,400
5 1,500
9 1,900
Compound Interest (annual)
Acompound = P(1+r)t
A = 1000(1.10)9
Acompound = $2,357.95
Year A(t)
0 1,000 1000(1.1)0
1 1,100 1000(1.1)1
2 1,210 1000(1.1)2
3 1,331 1000(1.1)3
4 1,464 1000(1.1)4
5 1,611 1000(1.1)5
9 2,358 1000(1.1)6
Calculating Interest and Exponential Growth
6. Finding the Initial Value
Of Exponential Growth/Interest
• Compound Interest Formula with Periodic Compounding
A = P(1 + r/n)nt
• To find the Initial Value, we need to solve for P
• We will be given: A, r, n, t
Calculating Interest and Exponential Growth
6. Finding the Initial Value
Of Exponential Growth/Interest
Ex 1: The future value of an investment at the end of five years is $25,000. What is the initial investment if you earned 10% interest, compounded annually?
A = 25,000P = ?r = 0.10n = 1 (annually)t = 5 (years)
25000 = P(1 + 0.1/1)(1*5)
25000 = P(1.61051)
25000 = 1.61051P1.61051 1.61051
$15,523.03 = PThis initial value was $15,523.03
Check:
15523.03(1.1)5
= 25,000
A = P(1 + r/n)nt
Go to five decimal places
Calculating Interest and Exponential Growth
6. Finding the Initial Value
Of Exponential Growth/Interest
Ex 2: The future value of an investment at the end of seven years is $35,000. What is the initial investment if you earned 5% interest, compounded quarterly?
A = 35,000P = ?r = 0.05n = 4 (quarterly)t = 7 (years)
35000 = P(1 + 0.05/4)(4*7)
35000 = P(1.41599)
35000 = 1.41599P1.41599 1.41599
$24,717.69 = PThis initial value was $24,717.69
Check:
24717.69(1.0125)28
= 35,000
A = P(1 + r/n)nt
Go to five decimal places
Calculating Interest and Exponential Growth
6. Finding the Initial Value
Of Exponential Growth/Interest
Ex 3: You decide you need $50,000 to go to graduate school in five years. You find an investment that pays 12% interest, compounded monthly. How much money will you need to invest today, to go to graduate school in five years ?
A = 50,000P = ?r = 0.12n = 12 (monthly)t = 5 (years)
50000 = P(1 + 0.12/12)(12*5)
50000 = P(1.81670)
50000 = 1.81670P1.81670 1.81670
$27,522.48 = PThis initial value was $27,522.48
Check:
27522.48(1.01)60
= 50,000
A = P(1 + r/n)nt
Go to five decimal places
Calculating Interest and Exponential Growth
7. What is Annual Percentage Yield?
Comparing
APY vs. APR
• The Annual Percentage Rate (APR) is the rate of interest earned per year.
• This is the rate that we’ve used in all of our problems so far
• The Annual Percentage Yield (APY) is the actual annual percent earned when you calculate for compounding
• APY ≥ APR
• Both are rates per one year
1 + APY = (1 + APR/n)(n*t)
Calculating Interest and Exponential Growth
Ex 1: Annual Percentage Rate (APR) is 10% and interest is compounded annually. What is APY?
r = APR = 0.10n = 1 (annually)t = 1 (years)
1 + APY = (1 + r/n)(n*t)
1 + APY = (1 + 0.10/1)(1*1)
1 + APY = 1.10000-1 -1 APY = 0.10 = 10%
If annual compoundingAPY = APR
Go to five decimal places
7. What is Annual Percentage Yield?
Comparing
APY vs. APR
Calculating Interest and Exponential Growth
Ex 2: Annual Percentage Rate (APR) is 10% and interest is compounded quarterly. What is APY?
r = APR = 0.10n = 4 (annually)t = 1 (years)
1 + APY = (1 + r/n)(n*t)
1 + APY = (1 + 0.10/4)(4*1)
1 + APY = 1.10381-1 -1 APY = 0.10381 = 10.381%
10.38% > 10% APY > APR bcs of compounding
Go to five decimal places
7. What is Annual Percentage Yield?
Comparing
APY vs. APR
Calculating Interest and Exponential Growth
Ex 3: Annual Percentage Rate (APR) is 10% and interest is compounded daily. What is APY?
r = APR = 0.10n = 365 (annually)t = 1 (years)
1 + APY = (1 + r/n)(n*t)
1 + APY = (1 + 0.10/365)(365*1)
1 + APY = 1.10516-1 -1 APY = 0.10516 = 10.516%
10.52% > 10% APY > APR bcs of compounding
Round to five decimal places
7. What is Annual Percentage Yield?
Comparing
APY vs. APR
Calculating Interest and Exponential Growth
7. What is Annual Percentage Yield?
Comparing
APY vs. APR
• Why does it matter?
• Loans will advertise APR (even though you pay higher APY because of compounding)
• Investments will advertise APY (since it is higher than APR)