Simple Interest Basics
What formula is used to calculate simple interest?
I=Prt
What formula is used for compound interest?
A=P(1+n/r)nt
Find the future value of $500 invested at 4% compounded annually for 1 year.
$520
In the formula I=Prt what does r represent?
Annual interest rate (as a decimal)
What does n represent in the compound interest formula?
Number of compounding periods per year
Find the future value of $2000 invested at 3% compounded annually for 3 years.
≈ $2185.45
A student invests $1000 at 5% simple interest for 3 years. How much interest is earned?
$150
How many times per year is interest compounded if it is compounded:
-semi-annually
-quarterly
-weekly
2
4
52
Find the interest earned on $1500 invested at 5% compounded annually for 2 years.
≈ $153.75
A loan earned $320 in simple interest. The principal was $2000 for 4 years. What was the interest rate?
4%
$1000 is invested at 4% compounded annually for 2 years. Find the future value.
$1081.60
Jocelyn invests $4000 at 6% compounded annually for 4 years. Find the future value.
≈ $5049.98
A loan of $2500 grows to $2900 in 5 years using simple interest. Find the annual interest rate.
3.2%
Simple interest is calculated only on the original amount of money (the principal). The amount of interest earned each year stays the same.
Compound interest is calculated on the original principal and on any interest that has already been earned. This means the amount of interest earned increases over time.
Compound interest grows faster because it earns interest on interest. Each time interest is added to the account, the balance becomes larger.
Kaylub wants his investment to grow to $6,000 in 5 years. The account earns 4.2% annual interest compounded semi-annually. How much money must he invest today?
$4922.09