Lesson 1 – Simple and Compound Interest Learning Goal I can calculate simple and compound interest

Lesson 1 – Simple and Compound Interest Simple Interest: Interest earned or paid only on the original sum of money invested or borrowed. Compound Interest: Interest that is added to the principal for the next period. You earn interest on your interest

Lesson 1 – Simple and Compound Interest Formula for simple interest: I = Prt, where: I: Interest earned ($) P: Principal (original amount invested or borrowed) ($) r= interest rate(as a decimal) t = time

Lesson 1 – Simple and Compound Interest Amount: The sum of the original principal and the interest. A = P + I, where: A = Amount P = Principal I = Interest

Lesson 1 – Simple and Compound Interest Example 1: If a Canadian Savings Bond (CSB) has a 6.5% annual interest rate, how much simple interest will you have after 5 years if you invest $100? Assume the interest rate doesn’t change.

Lesson 1 – Simple and Compound Interest Example 2: William used his credit card to purchase a new computer for $655. He did not pay his bill on time and it is now 3 months overdue. The annual interest rate on the card is 24.8%. How much interest does William need to pay?

Lesson 1 – Simple and Compound Interest Formula for compound interest: A = P(1+i) n, where A = the amount or Future Value in dollars P = the Principal, amount originally invested, in dollars i = the interest rate per compounding period n = the number of compounding periods Sometimes A = P(1+i) n is written as FV = PV(1+i) n

Lesson 1 – Simple and Compound Interest Here are some typical compounding periods: Annually (Once per year) Semi-Annually (Twice per year) Quarterly (4 Times per Year) Monthly (12 Times per year) Weekly (52 Times per year) Daily (365 Times per year)

Lesson 1 – Simple and Compound Interest i = Interest rate per compounding period. Since interest rates are normally given per annum, or per year, we must divide the yearly rate by the number of compounding periods per year. For example: If you had an investment, compounded monthly, that stated an interest rate of 12%/a, for 2 years, what number do you put in the formula for “i?”

Lesson 1 – Simple and Compound Interest n = the total number of compounding periods. If we are given the number of years for the investment, we need to multiply the number of years by the number of compounding periods in each year For example: If you had an investment, compounded monthly, that stated an interest rate of 12%/a, for 2 years, what number do you put in the formula for “n?”

Lesson 1 – Simple and Compound Interest Example 1: What is the future value of $10 invested with compound interest having an interest rate of 1.25%/a compounded monthly for 2 years?

Lesson 1 – Simple and Compound Interest Example 2: If you have $500 after 2 years compounded quarterly at 1.2%/a, what was your principal?

Lesson 1 – Simple and Compound Interest Example 3: Your credit card bill of $1265 charges interest of 19%/a compounded weekly. If you pay your bill 6 months late, how much interest do you have to pay? (Interest does not include the original $1265 that you owe)

Lesson 1 – Simple and Compound Interest Example 4: How much money would you need to invest today at 4%/a compounded semi-annually so that you would have $10,000 in ten years?

Lesson 1 – Simple and Compound Interest Example 5: If you plan to have $100,000 when you retire in 50 years with your money invested at 1%/annum compounded monthly, how much money would you need to initially invest?

Lesson 1 – Simple and Compound Interest Example 6: Mateo is planning to buy a car in 4 years. He estimates the car will be $11,000. Right now he would like to take a vacation that costs $1,500, but he can only go if he will have enough money to buy the car in 4 years. He plans to invest his money into a 4%/annum compound interest investment with monthly compound periods. If he has $10,000 right now, does he have enough money to pay for his trip?

Lesson 1 – Simple and Compound Interest Practice  Pg. 481 #3, 4, 5, 11  Pg. 491 #6, 7, 9, 10  Pg. 498 #4, 5, 9, 10, 11