Simple Interest Compound Interest

When we open a savings account, we are actually lending money to the bank or credit union. The bank or credit union pays a fee to the savings account holders and charges a higher fee to it borrowers. These fees are called interest. Interest is a fee paid or a charge made for lending or borrowing money. The amount of money borrowed is called the principal. The charge for interest is often given as a percent, called the interest rate or rate of interest. 2

3 Formula for Simple Interest Interest = principal rate time The formula is usually written using letters I = p r t Note: Simple interest is used for most short-term business loans, most real estate loans, and many automobile and consumer loans.

Find the interest on $6000 at 8% for 1 year. 4 Parallel Example 1 Finding Interest for a Year I = p r t The interest is $480. The principal (p) = $6000 The interest rate (r) = 8% or 0.08 The time of the loan is 1 year.

Find the interest on $3400 at 6% for two and a half years. 5 Parallel Example 2 Finding Interest for More Than a Year I = p r t The interest is $510. The principal (p) = $3400 The interest rate (r) = 6% or 0.06 The time of the loan is 2.5 years.

Find the interest on $340 at 6% for 8 months. 6 Parallel Example 3 Finding Interest for Less Than 1 Year I = p r t The interest is $ The principal (p) = $340 The interest rate (r) = 6% or 0.06 The time of the loan is 8/12 of a year.

7 Formula for Amount Due amount due = principal + interest

A loan of $4200 was made at 5% for 6 months. Find the total amount due. 8 Parallel Example 4 Calculating the Total Amount Due I = p r t Amount due = principal + interest Find the interest. = = 4305 The total amount due is $4305 I = 105

Compound Interest Formula (for a Finite Number of Periods) If a principal of P dollars is deposited at an annual rate of interest r compounded (paid) n times per year, then the account will contain dollars after t years. (In this formula, r is expressed as a decimal.) 9 Solve applications of compound interest.

Find the value of $2000 deposited at 4% compounded quarterly for 10 years. Use with P = 2000, r = 4% = 0.04, n = 4 (compounded quarterly), and t = 10. The value is about $ CLASSROOM EXAMPLE 6 Solving a Compound Interest Problem for A Solution:

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