Compound Interest Lesson 3.5

Agree or Disagree ? A bank account that pays 12% per year yields the same results as a bank account that pays 1% every month and compounds interest.

Nominal vs. Effective Rate Nominal rate  The stated yearly rate  "12% compounded monthly" Effective rate  The result of the compounding  12% compounded monthly actually gives a % return on your investment

Compound Interest Formula Actually we saw this in the previous lesson Here  r = the nominal rate  Then is the decimal for the effective rate

Periodic vs. Continuous Note the similarities between periodic compounding and continuous compounding

Periodic vs. Continuous The k in the continuous model will always be similar or close to the r value in the periodic compounding model Generally r must be slightly larger because there are "less" compounding periods per year Example  Convert B = P e.05t to periodic  Convert 7.25% compounded monthly to continuous form

Assignment Lesson 3.5 Page – 21 odd