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Unit 8 – Personal Finance

Compound Interest Formula. Unit 8 – Personal Finance. Question for thought. You invest $1000 at a rate of 12% per year. If you get interest every month, how much should you get at the end of the first month?. Compound Interest Formula. Or. Where:

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Unit 8 – Personal Finance

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  1. Compound Interest Formula Unit 8 – Personal Finance

  2. Question for thought • You invest $1000 at a rate of 12% per year. If you get interest every month, how much should you get at the end of the first month?

  3. Compound Interest Formula Or • Where: • A = Total Amount of investment (or Future Value) • P = Principal (or Present Value) • i = interest rate as a decimal, per compounding period • n = total number of compounding periods

  4. Interest Formula • “i“ and “n” are both dependent upon the compounding period:

  5. Example 1 • Calculate the amount of the investment if $500 is invested at 3% compounded quarterly for 3 years. • A=?, P=500, , n=3×4=12 • The amount of the investment after three years is $546.90

  6. Example 2 • Jack borrowed $8000 to start a small business. The interest rate on the loan was 10% per year, compounded monthly. He is expected to repay the loan in full after 5 years. • How much must Jack repay? • How much of the amount Jack repays will be interest?

  7. Solution • How much must Jack repay? • A=?, P=8000, , n=5×12=60 • Jack will have to repay $13,162.47

  8. Solution • How much of the amount Jack repays will be interest? • Interest Paid = A-P • Interest Paid = $13,162.47-$8000 • Interest Paid = $5,162.47 • Jack will pay $5162.47 in interest

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