HOW TO MAKE MONEY WITHOUT DOING ANY WORK INTEREST HOW TO MAKE MONEY WITHOUT DOING ANY WORK

TERMS TO KNOW: Principal – the amount of money you deposit Interest – the amount of money the bank pays you for use of your principal Interest rate – the percent rate the bank pays per year Simple interest – interest paid only on the principal

SIMPLE INTEREST

SIMPLE INTEREST Where I = is the interest P = is the principal R = is the interest rate per year T = is the time in years

EXAMPLE 1 Suppose you deposit $1000 in an account that pays 8.5% per year. How much simple interest will you have after: 4 years 10 years

EXAMPLE 2 Suppose that you deposit $500 into an account with a simple interest rate of 7.25% per year. How much total money will you have in the account after 7 years?

COMPOUND INTEREST When a bank pays interest on both the principal, and the interest earned. Balance – the principal plus any interest earned. This is used to determine the amount for the next interest period.

TERMS YOU MUST KNOW: Annual – 1 time per year Semiannual – 2 times per year Quarterly – 4 times per year Monthly – 12 per year Daily – 360 per year (NOT 365)

Suppose you deposit $1000 into an account that earns 5% compounded annually. What is the balance in the account after 4 years?

Principal at beginning of year Suppose you deposit $1000 into an account that earns 5% compounded annually. What is the balance in the account after 4 years? Principal at beginning of year Interest Balance Year 1: 1000 Year 2: Year 3: Year 4:

Principal at beginning of year Suppose you deposit $1000 into an account that earns 5% compounded annually. What is the balance in the account after 4 years? Principal at beginning of year Interest Balance Year 1: 1000 1000 X 0.05 = 50.00 Year 2: Year 3: Year 4:

Principal at beginning of year Suppose you deposit $1000 into an account that earns 5% compounded annually. What is the balance in the account after 4 years? Principal at beginning of year Interest Balance Year 1: 1000 1000 X 0.05 = 50.00 1000 + 50 = 1050 Year 2: Year 3: Year 4:

Principal at beginning of year Suppose you deposit $1000 into an account that earns 5% compounded annually. What is the balance in the account after 4 years? Principal at beginning of year Interest Balance Year 1: 1000 1000 X 0.05 = 50.00 1000 + 50 = 1050 Year 2: 1050.00 Year 3: Year 4:

Principal at beginning of year Suppose you deposit $1000 into an account that earns 5% compounded annually. What is the balance in the account after 4 years? Principal at beginning of year Interest Balance Year 1: 1000 1000 X 0.05 = 50.00 1000 + 50 = 1050 Year 2: 1050 1050 X 0.05 = 52.50 1050 + 52.50 = 1102.50 Year 3: Year 4:

Principal at beginning of year Suppose you deposit $1000 into an account that earns 5% compounded annually. What is the balance in the account after 4 years? Principal at beginning of year Interest Balance Year 1: 1000 1000 X 0.05 = 50.00 1000 + 50 = 1050 Year 2: 1050 1050 X 0.05 = 52.50 1050 + 52.50 = 1102.50 Year 3: 1102.50 1102.50 X 0.05 = 55.13 1102.50 + 55.13 = 1157.63 Year 4:

Principal at beginning of year Suppose you deposit $1000 into an account that earns 5% compounded annually. What is the balance in the account after 4 years? Principal at beginning of year Interest Balance Year 1: 1000 1000 X 0.05 = 50.00 1000 + 50 = 1050 Year 2: 1050 1050 X 0.05 = 52.50 1050 + 52.50 = 1102.50 Year 3: 1102.50 1102.50 X 0.05 = 55.13 1102.50 + 55.13 = 1157.63 Year 4: 1157.63 1157.63 X 0.05 = 57.88 1157.63 + 57.88 = 1215.51

COMPOUND INTEREST FORMULA where B is the final balance, p is the principal, r is the interest rate for EACH interest period, and n is the number of interest periods

EXAMPLE 1 Suppose you deposit $1000 into an account that earns 5% compounded annually. What is the balance in the account after 4 years?

YOUR RETIREMENT Suppose you deposit $1200 into an account that pays 4% compounded quarterly. How much will you have in the account after 50 years? Because the interest is compounded quarterly, you need to take the interest rate and divide by 4. Interest rate: 1% Also, the interest is given 4 times per year or 200 times

YOUR RETIREMENT Suppose you deposit $1200 into an account that pays 4% compounded quarterly. How much will you have in the account after 50 years?

THINGS TO REALLY THINK ABOUT: Right now you have the greatest asset: TIME How hard is it to save $1000 now??? How much will it be worth when you are 65??

YOUR RETIREMENT Suppose you invest $1000 into an account that pays 5% compounded annually. What will the balance be 40 years from now?

This is a percent of change of 604%!!! YOUR RETIREMENT Suppose you invest $1000 into an account that pays 5% compounded annually. What will the balance be 40 years from now? This is a percent of change of 604%!!!

ACCOUNT COMPARISONS Suppose you are given the option of investing $1500 in an account that pays 8% compounded annually, or an account that pays 8% per year compounded quarterly. In which account would you have the larger balance after 30 years?

Number of times interest is applied ACCOUNT COMPARISONS Account Interest Rate Number of times interest is applied Final Balance 8% annually 8% quarterly

Number of times interest is applied ACCOUNT COMPARISONS Account Interest Rate Number of times interest is applied Final Balance 8% annually 0.08 8% quarterly

Number of times interest is applied ACCOUNT COMPARISONS Account Interest Rate Number of times interest is applied Final Balance 8% annually 0.08 8% quarterly 0.08/4 = 0.02

Number of times interest is applied ACCOUNT COMPARISONS Account Interest Rate Number of times interest is applied Final Balance 8% annually 0.08 30 8% quarterly 0.08/4 = 0.02

Number of times interest is applied ACCOUNT COMPARISONS Account Interest Rate Number of times interest is applied Final Balance 8% annually 0.08 30 8% quarterly 0.08/4 = 0.02 30 X 4 = 120

Number of times interest is applied ACCOUNT COMPARISONS Account Interest Rate Number of times interest is applied Final Balance 8% annually 0.08 30 15,093.99 8% quarterly 0.08/4 = 0.02 30 X 4 = 120

Number of times interest is applied ACCOUNT COMPARISONS Account Interest Rate Number of times interest is applied Final Balance 8% annually 0.08 30 15,093.99 8% quarterly 0.08/4 = 0.02 30 X 4 = 120 16,147.74

ASSIGNMENT 7-8: 1 – 17, 20 QUIZ TOMORROW!!!