1. AND

2. Chapter 11
Consumer Mathematics

3. WHAT YOU WILL LEARN
• Compound Interest

4. Section 3
Compound Interest

5. Investments
An investment is the use of money or capital for income or profit.
In a fixed investment, the amount invested as principal is guaranteed and the interest is computed at a fixed rate.
In a variable investment, neither the principal nor the the interest is guaranteed.

6. Compound Interest Formula
A is the amount that accumulates in the account
p is the principal
r is the annual interest rate as a decimal
t is the time in years
n is the number of compound periods per year

7. Example: Compound Interest Formula
Mr. Martin put $5000 into a trust fund on his daughter’s 16th birthday. The trust fund pays 9% interest compounded semiannually. What will the trust fund be worth on her 21st birthday?

8. Solution
The trust fund will be worth $ on her 21st birthday.

9. Annual Percent Yield
The effective annual yield or annual percentage yield (APY) is the simple interest rate that gives the same amount of interest as a compound rate over the same period of time.

10. Present Value Formula
p is the present value, or principal to invest now
A is the amount to be accumulated in the account
r is the annual interest rate as a decimal
n is the number of compound periods per year
t is the time in years

11. EXAMPLE: Present Value Formula
Jim Garrison wants to have $30,000 available in 3 years to buy a new car. How much does he need to invest now in a CD paying 5.25% interest compounded monthly?

12. Solution
Jim Garrison needs to invest approximately $25, now to have $30,000 in 3 years for his new car.