SIMPLE AND COMPOUND INTEREST

1. SIMPLE AND COMPOUND INTEREST Since this section involves what can happen to your money, it should be of INTEREST to you!

2. 100 IMPLE INTEREST FORMULA Annual interest rate Interest paid I = PRT Time (in years) Principal(Amount of money invested or borrowed)

3. 100 If you invested $200.00 in an account that paid simple interest, find how long you’d need to leave it in at 4% interest to make $10.00. enter in formula as a decimal I = PRT 10 = (200)(0.04)T 1.25 yrs = T Typically interest is NOT simple interest but is paid semi-annually (twice a year), quarterly (4 times per year), monthly (12 times per year), or even daily (365 times per year).

4. COMPOUND INTEREST FORMULA annual interest rate(as a decimal) Principal(amount at start) time(in years) amount at the end number of times per year that interest in compounded

5. 4 (2) .08 500 4 Find the amount that results from $500 invested at 8% compounded quarterly after a period of 2 years. Effective rate of interest is the equivalent annual simple rate of interest that would yield the same amount as that made compounding. This is found by finding the interest made when compounded and subbing that in the simple interest formula and solving for rate. Find the effective rate of interest for the problem above. The interest made was $85.83. Use the simple interest formula and solve for r to get the effective rate of interest. I = Prt 85.83=(500)r(2) r = .08583 = 8.583%

6. Acknowledgement I wish to thank Shawna Haider from Salt Lake Community College, Utah USA for her hard work in creating this PowerPoint. www.slcc.edu Shawna has kindly given permission for this resource to be downloaded from www.mathxtc.com and for it to be modified to suit the Western Australian Mathematics Curriculum. Stephen Corcoran Head of Mathematics St Stephen’s School – Carramar www.ststephens.wa.edu.au