7-7 Simple and Compound Interest

Definitions

Left side• Principal

• Interest

• Interest rate

• Simple interest

Right side• When you first deposit

money• Money the bank pays you

(free money)• Percentage of the balance

that an account earns in a fixed period of time

• Interest paid only on the principal

• Compound interest

• Balance

• When bank pays interest on the principal and on the interest an account has earned

• The principal plus the interest

I = prt

• I = interest (how much free money you earn)

• P = principal (amount you invest, deposit, start out with)

• R = rate (change to a decimal)

• T = time (yrs)

1. Find simple interest

• Suppose you deposit $500 into a savings account. The interest rate is 4% per year. – Find simple interest

earned in 6 years– Find total principal plus

interest

• I = prt– 500 • .04 • 6– I = 120

• Total = 500 + 120 = 620

Solve on your own…

• Find simple interest– Principal =$250– Rate = 4%– Time = 3 yrs

• Find simple interest– Principal = $250– Rate = 3.5%– Time = 6 months

2. Use a table to find compound interest

• You deposit $400 that earns 5% interest compounded annually. What is balance after 4 years?

Principal at beginning

Interest Balance

Year 1: $400 400 x .05 = $20

$400 + $20 =$420

Year 2:

Year 3:

Year 4:

Compound interest formula

• B = p(1 + r)ⁿ

• B= balance• P= principal• R= rate• N =years and interest

periods

• Principal = $1000• Rate 4%• Time = semiannually for

2 years

• B = 1000(1 + .04)⁴• B =

Homework

Textbook p. 380 ( 1-43 even)Test on Friday!