1 / 7

Compound Interest

This lesson explores the concept of compound interest, specifically the differences between nominal and effective rates, the compound interest formula, and the comparison between periodic and continuous compounding.

bruner
Download Presentation

Compound Interest

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Compound Interest Lesson 3.5

  2. Agree or Disagree ? • A bank account that pays 12% per year yields the same results as a bank account that pays 1% every month and compounds interest.

  3. Nominal vs. Effective Rate • Nominal rate • The stated yearly rate • "12% compounded monthly" • Effective rate • The result of the compounding • 12% compounded monthly actually gives a 12.683% return on your investment

  4. Compound Interest Formula • Actually we saw this in the previous lesson • Here • r = the nominal rate • Then is the decimal for the effective rate

  5. Periodic vs. Continuous • Note the similarities between periodic compoundingand continuous compounding

  6. Periodic vs. Continuous • The k in the continuous model will always be similaror close to the r value in the periodic compounding model • Generally r must be slightly larger because there are "less" compounding periods per year • Example • Convert B = P e .05t to periodic • Convert 7.25% compounded monthly to continuous form

  7. Assignment • Lesson 3.5 • Page 139 • 1 – 21 odd

More Related