Simple & Compound Interest

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Simple & Compound Interest

description

Simple & Compound Interest. Simple Interest. -Interest paid only on an initial amount deposited or the amount borrowed. -The amount is called the PRINCIPLE. Term. -The length of TIME in years over which the $$ is deposited or borrowed. Often expressed as “PER ANNUM”. - PowerPoint PPT Presentation

Transcript of Simple & Compound Interest

Page 1: Simple & Compound Interest

Simple & CompoundInterest

Page 2: Simple & Compound Interest

Simple Interest

-Interest paid only on an initial amount deposited or

the amount borrowed

-The amount is called the PRINCIPLE

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Term

-The length of TIME in years over which the $$ is deposited

or borrowed

Often expressed as “PER ANNUM”

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Calculating Formula

The amount of simple interest accumulated on an investment or loan is calculated using this

formula

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I = Prt

I = the amount of interest earned or dueP = the Principle

r = the annual interest rate(expressed as a decimal)

t = the term of investment or loan

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For an investment:

Calculate the total value at the end of the term

using this formula:

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A = P + I

A=final value of the investmentP=PrincipleI=Amount of Interest

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ExampleYou want to invest

$5000 in an account that offers simple

interest.How much would the investment be worth at the end of a 2yr

term at 3%?

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First change the interest rate to a decimle

3% = .03

Principle = $5000Term = 2yrs

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I = Prt

I = $5000 x .03 x 2ysI= $300

Now calculate the final valueA=P+I

A= $5000 + $300A=$5300

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Converting Interest to a

decimal4.75% converted to a

decimal

=4.75 ÷ 100 = .0475

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Use the same Principleand calculate at a rate of

3.75% for 4 yrs

I = $5000 x .0375 x 4 = $750

Calculate the final value

A = $5000 + $750 = $5750

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Let’s Try Shall we?

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Compound Interest

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A type of interest that is calculated on the principle, plus any

interest PREVIOUSLY earned

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Example

-If you invest $$ for two years, but earn interest annually…

-the second year of interest will be calculated on the initial principle PLUS the interest it

earned in the 1st year

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Example

-$5000 @ 3% for 2 yrs calculated using COMPOUND

Interest

Year 1I = $5000 x .03 x 1yr = $150A = $5000 + $150 = $5150

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Example

Year 2I = $5150 x .03 x 1 = $154.50

A = $5150 + $154.50 = $5304.50

Therefore - $5000 compounded “annually” over

2yrs @ 3% = a return of $304.50

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Compounding Period

If the interest is compounded annually = once/yr

Investments can have different compounding

periods

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Example

Interest can be calculated “SEMI-Annually”

Twice/year

Interest can be calculated “QUARTERLY”4 x per year

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Example

Interest can be calculated “MONTHLY”Once/Month

Interest can be calculated “DAILY”

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Calculation Formula

A = P(1+r ) n

A = Final ValueP = Principler = Interest Raten = Number of compound periodst = term of investment/loan

nt

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Example

Calculate the interest earned on $1000 put in an account

that offers 4%/annum compounded annually for 2yrs

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Example

A = P(1+r ) n

A = $1000 x (1 + 0.04 ) 1

nt

1x2

A = $1000 x (1.04)

2

A = $1081.60

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Compare w/Simple Interest

I = $1000 x 4% x 2

I = $1000 x .04% x 2

I = $80A = $1000 + $80 =

$1080Compound Int. = $1081.60