What is compound interest?Interest paid on the principal and on the interest accumulated to date.Used in savings accounts, credit cardsCompounded for daily, quarterly (4 times a year) , semi-annually (twice a year), or annuallyUse the compound interest table

What is balance?Sum of the principal plus the interest earned

Compound Interest Chart- shows what factor the deposit will be multiplied by to find the balance

factor

Let’s look at a problem:

Ms. Johnson deposits $12,000 in a savings account that pays interest quarterly. The annual interest rate paid by the bank is 6%. How much money will she have in the bank at the end of one year?

1. Find the interest rate per period:Number of interest periods- 4 (1 year has 4 quarters)Quarterly rate of interest- 6% ÷ 4 = 1.5%

2. Go to Interest table

3. Multiply the deposit by the factor to find the balance.1.0614 x $12,000 = $12,736.80

4. Subtract the PRINCIPAL from the BALANCE to find how much interest is earned.$12,736.80- 12,000 = $736.80

So, Ms. Johnson will earn $736.80 interest leading to a balance of $12,736.80 at the end of the year.

Here’s another:

Mel deposits $5000 in an account. The annual interest rate is 8%, compounded semi-annually. How much interest will he earn in 1 year? What is the balance after 1 year?

1. Find the number of periods- semi-annually refers to 2 periodsRate of interest- 8% ÷ 2 = 4%

2. Look for the factor

3. Multiply the deposit by the factor.1.0816 x $5000 = $5408 (BALANCE)

4. Subtract the principal from the balance.$5408 – 5000 = $408 (INTEREST EARNED)

Let’s look at one more- multiple years:

Dylan deposits $4000 in his savings account. The annual interest rate is 8% compounded quarterly. How much interest will he earn in 2 years?

1. Find the number of interest periods and the rate of interest.Periods- 4 x 2 = 8 periodsRate of interest- 8% ÷ 4 = 2%

2. Look for factor

3. Multiply the deposit by the factor: 1.1717 x $4000 = $4686.80 (BALANCE)

4. Subtract the principal from the balance: $4686.80 – 4000 = 686.80 (INTEREST EARNED)

Now you will practice.

$10,000 deposit at an annual rate of 7% compounded semi-annually for 2 years

2. Use chart on page 200

1. 2 x 2 = 4 periods, 7% ÷ 2 = 3.5%

3. $10,000 x 1.1475 = $11,475 (BALANCE)

4. $11,475 – 10,000 = $1,475 (INTEREST EARNED)