# Chapter 6 Section 3 by yurtgc548

VIEWS: 6 PAGES: 8

• pg 1
```									Chapter 6 Section 3

Gabby Prezkop
Period 7
Compound Interest
• Compound interest is the total amount of an
investment, A, earning compound interest is:
• A(t)=P(1+r/n)nt
• Where P is the principal , r, is the annual
interest rate, n, is the number of times
interest is compounded per year & t is the
time in years.
• Annual is compounded 1 a year.
• Quarterly is compounded 4 times a year.
• Monthly is compounded 12 times a year. Once
every month.
• Daily is compounded 365 times a year. Once a
day.
Examples
• Suppose Karen has \$1000 that she invests in
an account that pays 3.5% interest
compounded quarterly. How much money
does Karen have at the end of 5 years?
• How to Solve:
• You first plug \$1000 in for the principal
because that is the amount that she invested.
• A= 1000(1+r/n)nt
How to:
Next, put the 3.5% interest rate in for r as a
decimal.
And plug in four for n because its compounded
quarterly.
Lastly, plug a 5 in for t because it’s the amount
compounded after 5 years.
A=1000(1+.035/4)4(5)
And use the order of operations to solve!
• Problem 1) If you have a bank account whose
principal = \$1000, and your bank compounds
the interest twice a year at an interest rate of
5%, how much money do you have in your
account at the year's end?

• Problem 2) If you start a bank account with
\$10,000 and your bank compounds the
interest quarterly at an interest rate of 8%,
how much money do you have at the years
end ? (assume that you do not add or
withdraw any money from the account)
• Problem 1:
A=1000(1+.05/2)2(1)
A=\$1050.63

Problem 2:
A= 10000(1+.08/4)4(1)
A=\$10824.32
Effective Yield
• Effective yield is annually compounded
interest rate that yields the final amount of an
investment.

```
To top