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Simple and Compound Interest

This lesson covers the fundamental concepts of simple and compound interest, including how to calculate earned interest and account balances. You will learn about interest formulas, such as I = prt for simple interest and A = p(1 + r)^t for compound interest. Through practical examples, you will find out how much interest is earned over time and how to compute the final account balance. Gain the skills needed to manage finances, whether through savings accounts or loans, effectively and confidently.

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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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