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Simple and Compound Interest

Simple and Compound Interest. Lesson 7.7 OBJ: To calculate interest earned and account balances. Simple Interest. I = prt; where p is principal, r is the rate and t is the time in years. Interest – The amount earned or paid for the use of money.

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Simple and Compound Interest

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  1. Simple and Compound Interest Lesson 7.7 OBJ: To calculate interest earned and account balances

  2. Simple Interest • I = prt; where p is principal, r is the rate and t is the time in years. • Interest – The amount earned or paid for the use of money. • Principal – The amount of money borrowed or deposited. • Simple Interest – The amount paid only on the principal • Annual Interest Rate – The percent of the principal earned or paid per year.

  3. Examples • A $1000 bond earns 6% simple annual interest. What is the interest earned after 4 years? • Find the simple interest earned on $500 after 5 years in a money market account paying 5%.

  4. Balance (A) • The amount of an account that earns simple interest is the sum of the interest and the principal. • A = p + prt or A = p(1 + rt) • You can use either formula to get the balance when calculating the balance after simple interest.

  5. Examples • Susan deposits $2000 into her savings account. What is her balance after she earns 7% simple interest for 6 years? • Find the unknown amount A = ? p = $1000 r = 2.5% t = 2 years

  6. Examples • A = $1424.50 p = ? r = 3.5% t = 6 months Remember time must be in years!!!

  7. Compound Interest • The interest that is earned on both the principal and any interest that has been previously earned. • Formula A = p(1 + r)t • Example – You deposit $1200 into an account that earns 3.8% interst compounded annually. Find the balance after 5 years.

  8. Examples • You deposit $1200 into an account that earns 3.8% interest compounded annually. Find the balance after 5 years. • Max borrows $3500 for a new car. The loan has 6.7% interest that will be compounded annually. How much money will he owe after 36 months?

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