1. SIMPLE AND COMPOUND INTEREST
Since this section involves what can happen to your money, it should be of INTEREST to you!

2. Simple Interest: Depends On PRINCIPAL AMOUNT* (P) INTEREST RATE (R)
Found by multiplying the interest rate by the principal amount by time
Depends On
PRINCIPAL AMOUNT* (P)
INTEREST RATE (R)
TIME (T)
*Principal Amount: Original amount borrowed or invested

3. I = PRT IMPLE INTEREST FORMULA Annual interest rate Interest paid
Time (in years)
Principal (Amount of money invested or borrowed)

4. I = PRT Examples I = (4000)(0.05)(5) I= $1,000
If you borrowed $4,000 at an interest rate of 5% for 5 years, how much interest would you pay on the loan?
I = PRT
enter in formula as a decimal
I = (4000)(0.05)(5)
I= $1,000
Amount of interest paid = $1,000
Total amount repaid = $5,000

5. If you invested $ in an account that paid simple interest, find how long you’d need to leave it in at 4% interest to make $10.00.
enter in formula as a decimal
I = PRT
10 = (200)(0.04)T
1.25 yrs = T
Typically interest is NOT simple interest but is paid semi-annually (twice a year), quarterly (4 times per year), monthly (12 times per year), or even daily (365 times per year).

6. This is how investors make their money WORK for THEM!!
COMPOUND INTEREST
Compound Interest
Interest is added to principal each time it is calculated, causing the principal to increase for future calculations
Compound Interest allows your money to generate its own earnings.
This is how investors make their money WORK for THEM!!

7. COMPOUND INTEREST FORMULA
annual interest rate (as a decimal)
Principal (amount at start)
time (in years)
amount at the end
number of times per year that interest in compounded

8. COMPOUND INTEREST EXAMPLE
Find the amount that results from $500 invested at 8% compounded quarterly after a period of 2 years. 4
(2)
.08
500 4

9. COMPOUND INTEREST EXAMPLE 2
After 20 years of 6% interest compounded monthly, an account has $16, What was the original deposit amount? 12
(20)
.06
$16,551.02 12

10. EFFECTIVE RATE OF INTEREST
Effective rate of interest is the equivalent annual simple rate of interest that would yield the same amount as that made compounding. This is found by finding the interest made when compounded and subbing that in the simple interest formula and solving for rate.
Find the effective rate of interest for the problem on the previous slide.
The interest made was $ Use the simple interest formula and solve for r to get the effective rate of interest.
I = Prt =(500)r(2)
r = = 8.583%

11. RULE OF 72 72 ÷ interest rate* = number of years for money to double
Shortcut for calculating the effects of compound interest
72 ÷ interest rate* = number of years for money to double
*For the Rule of 72 DO NOT change percent to decimal
Rule of 72 video

12. Acknowledgement
I wish to thank Shawna Haider from Salt Lake Community College, Utah USA for her hard work in creating this PowerPoint.
Shawna has kindly given permission for this resource to be downloaded from and for it to be modified to suit the Western Australian Mathematics Curriculum.
Stephen Corcoran
Head of Mathematics
St Stephen’s School – Carramar