8.4 Simple and Compound Interest

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Presentation transcript:

8.4 Simple and Compound Interest CH 8, section 8.4 6120--106

Simple Interest I=PRT paid on average balance (principal) Interest = Principal x Rate x Time calculate annually paid on average balance (principal) Ex. Deposit of $100 at 6% P= $100 R= 6% T= 1 year I= 100 x .06 x 1= $6

Try a couple… You deposit $100 at 12% for 1 year You deposit $500 at 3.25% for 2 years You deposit $100 at 8% for 6 months (note a month is considered 1/12 of a year)

Compound Interest When you earn interest on both the principal (ie. Your initial deposit) and the interest. EX. After earning $6 in interest on your $100 investment, you allow that money to remain invested, making your principal for the following year $106.

Types of compounding Can be done Annually Semi annually Quarterly Monthly Daily Note: the more often your money compounds, the more interest you earn.

Examples for compound interest Refer to pages 274-275 of your Economic Education for Consumers book to review samples of compound interest

Rule of 72 Tells you how long it will take an investment to double in value. EX. At 10%, it will take my investment 7.2 years to double in value. 72/10= 7.2