Lesson38

Lesson38 - Lesson 38 MA 15200, Appendix I Section 5.5 You...

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1 Lesson 38 MA 15200, Appendix I Section 5.5 You are familiar with the simple interest formula, I prt = . However, in many accounts the interest is left in the account and earns interest also. We say the account earns compound interest. For example: Suppose Bob invests $100 at 10% simple interest. At the end of 1 year, Bob has earned 100(.10)(1) $10 I = = . He now has $110. At the end of the 2 nd year, Bob has earned 110(.10)(1) $11 I = = . He now has $121. At the end of the 3 rd year, Bob has earned 121(.10)(1) $12.10 I = = . He has a total of $143.10. I’m sure you get the idea of what is happening. Formula for Compound Interest with Annual compound interest: (1 ) , where is the initial investment (principal), is the number of years, is the annual interest rate, and is the future value or final value. t S P r P t r S = + Ex 1: Assume that $1500 is deposited in an account in which interest is compounded annually at a rate of 6%. Find the accumulated amount after 5 years. Ex 2: Assume that $1500 is deposited in an account in which interest is compounded annually for 5 years. Find the accumulated amount, if the interest rate is 8 ½ %. Many banks or financial institutions figure interest more often than once a year; quarterly monthly, semiannually, daily, etc. For example, if the annual rate or
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This note was uploaded on 04/23/2011 for the course MA 152 taught by Professor Owendavis during the Spring '08 term at Purdue.

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Lesson38 - Lesson 38 MA 15200, Appendix I Section 5.5 You...

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