1. Compound Interest
Lesson 3.5

2. 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.

3. 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

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

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

6. 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

7. Assignment
Lesson 3.5
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