7.7 Simple and Compound Interest. Interest You EARN interest when you put $ into a savings account. You PAY interest when you borrow money...bank, loan,

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Presentation transcript:

7.7 Simple and Compound Interest

Interest You EARN interest when you put $ into a savings account. You PAY interest when you borrow money...bank, loan, credit card Interest - amount earned or paid for the use of money. Principal - amount deposited or borrowed Annual Interest Rate - the percent of the principal earned/paid per year Simple Interest - when interest is earned/paid only on the principal. Compound Interest - when interest is earned on both the principal and any interest that has been earned previously.

Formula for Simple Interest

EX (simple interest) :

You get a summer job at a bakery. Suppose you save $1400 of your pay. After 9 months, the balance is $1421. Find the annual interest rate. I = prt = 1400(r)( ) 21 = 1050r r = 0.02 or 2%

Formula for Compound Interest A = P(1 + r)t Suppose you deposit $50 into a savings account that earns 2% interest compounded annually. What is your balance after 3 yrs? Formula: 1st Yr: 2nd Yr: 3rd Yr:

Formula for Compound Interest A = P(1 + r)t YearPrincipal at Start Interest Earned FormulaNew Balance 1 $50 (0.02)(50)= $1 50(1+0.02)1 $51 2 (0.02)(51) = $ (1+0.02)2 $ (0.02)(52.0 2)= $ (1+0.02)3 $53.06

Formula for Compound Interest A = P(1 + r)t = 1500( )6 = $ EX: You deposit $1500 into an account that earns 2.4% interest compounded annually. Find the balance after 6 years.