Unit 4_Credit

Simple and Compound Interest Unit 4 - InvestingDetermining Simple Interest I = p * r * tInterest = Principle X Rate X Time ( in years) The three things needed to calculate interestPrincipleThe amount put into the bank or the amount borrowed from the bankRateThe percent Timehow many years the money is in the savings account at the bank or how many years it will take you to pay back the loan.

Example #1Example: Ray put $1,000 into a savings account. The interest on the account is 3.5%. He wants to put the money away for 18 months.

Work the equation in your notes

Determine the simple interest for the loan

Interest = p x r x tI = $1,000 x 3.5% x 18I = $1,000 x .035 x 18 (change the percent to a decimal)I = $1,000 x .035 x 1.5(divide the number of months by 12)I = $52.50

Find the maturity of the loanMaturity ValueThe full amount of money that must be repaid when the loanThe principal plus the interest

*Determine the interest first, then determine the maturity value by adding the interest to the principalHow much does Ray have to pay back?Adding the interest back on to the principle, Ray now has $1,052.50

P+I=MV

1,000 + 52.50 = 1,052.50

Example #2Beth owes $38,000 in student loans. The interest rate on her loans is 8.25%. She will be paying these loans off for 20 years. How much will Beth pay altogether?

Work the equation in your notesHow much will Beth pay back all together? I = p x r x tI = $38,000 x 8.25% x 20I = $38,000 x .0825 x 20 (change the percent to a decimal)I = $62,700MV = $38,000 + $62,700Adding the interest back on to the principle, Beth has to pay $100,700Compound InterestEarning interest on interest

RememberInterest =Principle x Rate x Time in years Example:2 year period, $4,000 at 6.5% compounded annually

Y1: Use Simple Interest equation

Y2: Add interest from year one to principle to find out interest earned for year 2

How much will the account have total in the end?How much interest was earned over the two years? Example:2 year period, $4,000 at 6.5% compounded annually

Y1: P____ x R ______ x T _____ = ____ (Interest Earned)

Y2: P____ x R ______ x T _____ = ____ (Interest Earned)

End: _______ Total Interest Earned: ______Example:2 year period, $4,000 at 6.5% compounded annually

Y1: 4,000 x 6.5% x 1 = 260 (Interest Earned)Y2: 4,260 x 6.5% x 1 = 276.90

End: 4,536.90 Total Interest Earned: 536.90Months:Semiannually means you must convert the annual interest rate by 2 times. EX: Interest rate of 6.5% compounded semiannually means the interest rate will be 3.25% since it will be compounded 2 times Quarterly means you must convert the annual interest rate by 4.EX: Interest rate of 12% compounded quarterly means the interest rate will be 3% since it will be done 4 times. If it is done monthly then you would divide the interest rate by 12! Compounding Interest: Future Value Earning interest on interestMaking your money work for youA = P (1+ r/n)n*tIf you wanted to find out how much you would have after 5 yearsA is the amount in the accountP is the principal (which is the original amount invested) R= the interest rate is expressed as a decimalT= Time in years N= is the number of times it is compounded per year

15The power of Compounding:$4000.00 earning interest annually ( 1 time a year)Interest Rate1 Year2 years6.5%4260.004536.90A = P (1+ r/n)n*t

A = 4000 (1+ .065/1)1*2

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