Simple and Compound Interest

Video: Simple/ Compound Interest

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Interest● When you deposit money in a bank, you

EARN money for it. This money is called interest.

● When you borrow money from a bank, you are expected to pay for doing this. This is also called interest.

Principal and Simple Interest● PRINCIPAL is the original amount of money

you deposit or borrow.

● SIMPLE INTEREST is the interest earned only on the principal.

Simple Interest Formula

I = prt I ................. Is the interest earned ($ earned)p .........Is the principal ($ invested or borrowed)r ............. Is the interest rate per year t .......................... Is the time in years

Solve Simple Interest:Find the Simple Interest:1) You borrow $300 for 5 years at an annual interest rate of 4%.

What is the simple interest you pay in dollars?

Step 1) Write the formula…...I=prtStep 2) Substitute numbers for letters in formula

(convert % into decimal) p=$300r=4% (0.04)t = 5 years

The interest is $60. So while I borrowed $300, I had to pay the bank $60 for borrowing it.

I = prtI = 300x0.04x5I = $60

Compound Interest● COMPOUND INTEREST is interest paid on

the original principal and on the interest.

● THE BALANCE of an account is the principal plus the interest earned.

Compound Interest Formula

B = p(1 + r) t

B .................................. Is the Balancep ......Is the principal ($ deposited or borrowed)r ............. Is the interest rate per year t .......................... Is the time in years

Solve Compound InterestFind the Compound Interest 1)You borrow $5,000 from the bank and you have to pay the principal and interest off at end of 9 years. Compound Interest rate is 3.75% What is your balance after 9 years?

Step 1) Write the formula B = p(1 + r) t

Step 2) Substitute numbers for letters in formula(convert % into decimal)

p=$5000r=3.75% (0.0375)t=9

B = 5000 (1 + 0.0375) 9

Step 3) Use calculator to simplify (power)B = 5000 (1 + 0.0375) 9 =5000 (1.392813439)

Step 4) Round to nearest cent

B= $6964.07