Lesson28

# Lesson28 - Summer Lesson 28 MA 15200 Appendix I Sections...

This preview shows pages 1–3. Sign up to view the full content.

1 Summer Lesson 28 MA 15200, Appendix I Sections 5.5 and 5.6 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. ( A = P + Prt or A = P(1 +rt )) 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 SP r P tr 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 nominal rate is 12% and interest is compounded quarterly, that is equivalent to 3% every 3 months. 3% is called the periodic rate .

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
2 Formula for Periodic Rate: Periodic Rate = annual rate number of periods per year , where is annual interest rate, is the number of times interest is paid each year, and is the periodic rate.
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### Page1 / 6

Lesson28 - Summer Lesson 28 MA 15200 Appendix I Sections...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online