Compound Interest
Interest rate is constant, but the
dollar amount
of interest increases over time.
Ex: You invest money in a savings account, and the amount in your account builds up over time.
Interest is paid on principal and any accumulated interest.
Compound interest formula:
FV = PV × (1 + r)
t
Ex. 5: Compound Interest
You invest $100 in a savings account earning 10% in compound interest.
How much money is in
your account after 1 year?
2 years?
5 years? 10 years?
FV
1
= PV×(1+r)
t
= 100×(1+0.10)
1
= $110.00
FV
2
= PV×(1+r)
t
= 100×(1+0.10)
2
= $121.00
FV
5
= PV×(1+r)
t
= 100×(1+0.10)
5
= $161.05
FV
10
= PV×(1+r)
t
= 100×(1+0.10)
10
= $259.37
Simple vs. Compound
Simple and compound interest of 10% on $100 over periods of 1 year, 10 years, and 100 years:
For small investments, low interest rates, and short time periods, the returns on simple and
compound interest are approximately the same.
For large investments, high interest rates, or long time periods, compound interest pays more
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 Spring '09
 MURRAY
 Finance, Interest Rates, Interest, Interest Rate

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