Simple and Compound Interest

Simple Interest

• Interest is like “rent” on a loan. • You borrow money (principal).• You pay back all that you borrow plus more

(interest).• Interest is a percent (rate)of the amount

borrowed (principal).• Interest = principal x rate x time (in years)• Typically used in loans for new cars.

Example 1

• Find the simple interest paid annually for 2 years on $900 at 16% per year.

Example 2

• After 3 months the simple interest earned annually on an investment of $7000 was $63. Find the interest rate.

Compound Interest

• This is interest earned or paid on both the principal and previously earned interest.

• A is the final amount• P is the principal• r is the interest rate expressed as a decimal• n is the number of times the interest is

compounded• t is the time

nt

n

rPA )1(

$1500 is invested at a rate of 3.5% compounded annually for 4 years

Years Interest earned Amount in account

0 0 $1500

1 1500 x 0.035 x 1 $1552.50

2 1552.50 x 0.035 x 1 $1606.84

3 1606.84x0.035x1 $1663.08

4 1663.08x0.035x1 $1721.29

Example 3

• Find the amount in an account with $700 invested at a rate of 7.2% compounded quarterly for 2 years.

Example 4

• $28,000 invested at a rate of 4% compounded semi annually for 5 years.