Compound Interest

Financial Planning & Money Management Business Math Compound Interest Compound Interest – sum of the original principal and its compound interest. Interest period – the time (daily, monthly, quarterly, semiannually, or annually) Calculating Interest semiannually: divide the interest rate by 2 Calculating Interest quarterly: divide the interest rate by 4 Example $1,000 deposited into an account that pays 6% annually for 2 years. 1,000 * .06 *1 (first year) = $60 1,000 + 60 = 1,060 1,060 * .06 * 1 (second year) = 63.60 1,060 + 63.60 = $1,123.60 Now compound it quarterly (every 3 months) 1st: 6% divided by 4 quarters in a year = 1.5% per quarter 1,000 * .015 = 15.00 (1st quarter interest) 1,000 + 15 = 1,015

On Your Own: (year 2) 1,061.37 *

1,015 * .015 = 15.23 (2nd quarter interest) 1,015 + 15.23 = 1,030.23 1,030.23 * .015 = 15.45 (3rd quarter interest) 1,030.23 + 15.45 = 1,045.68 1,045.68 * .015 = 15.69 (4th quarter interest) 1,045.68 + 15.69 = 1,061.37 (at end of 1st year)

On Your Own Calculate the compound amount and interest at the end of a 2-year period. The original principal is #3,000 at 7 ¼% compounded annually. 1. Interest for first year

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2. Interest for second year

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3. Compound amount

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4. Compound interest

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Calculate the interest, compounded annually. Principal

Rate

Time (years)

$8,100

8%

2

$2,900

7%

5

Compounded Interest

Calculate the interest & total amount, compounded quarterly. Principal

Rate

Time (years)

$5,000

8%

2

$1,00

8%

2

Compounded Amount

Compounded Interest