Chapter 6 Section 3

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					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.

				
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