Copyright 2013, 2010, 2007, Pearson, Education, Inc.

Section 11.3

Compound Interest

Copyright 2013, 2010, 2007, Pearson, Education, Inc.

InvestmentsAn investment is the use of money or capital for income or profit.In a fixed investment, the amount invested as principal is guaranteed and the interest is computed at a fixed rate. In a variable investment, neither the principal nor the the interest is guaranteed.

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Copyright 2013, 2010, 2007, Pearson, Education, Inc.

Compound Interest

Interest that is computed on the principal and any accumulated interest is called compound interest.

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Compound Interest Formula

A is the amount that accumulates in the account

p is the principalr is the annual interest rate as a decimal

t is the time in yearsn is the number of compound periods per year

A p 1

r

n

nt

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Copyright 2013, 2010, 2007, Pearson, Education, Inc.

Example 2: Using the Compound Interest FormulaKathy Mowers invested $3000 in a savings account with an interest rate of 1.8% compounded monthly. If Kathy makes no other deposits into this account, determine the amount in the savings account after 2 years.

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Copyright 2013, 2010, 2007, Pearson, Education, Inc.

Example 2: Using the Compound Interest FormulaSolutionp = $3000, r = 0.018, n =12, t = 2

A p 1

r

n

nt

3000 1

0.018

12

122

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Copyright 2013, 2010, 2007, Pearson, Education, Inc.

Example 2: Using the Compound Interest FormulaSolution

3000(1 0.0015)122

3000(1.0015)24

3000(1.0366279)

3109.88The amount in the account after 2 years would be about $3109.88.

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