The Power of Compounding

Unit 4A

The Power of Compounding

Ms. Young

Slide 4-1

4-B

Definitions

The principal in financial formulas is the balance upon which interest is paid.

Simple interest is interest paid only on the original principal, and not on any interest added at later dates.

Compound interest is interest paid on both the original principal and on all interest that has been added to the original principal.

Ms. Young

Slide 4-2

Compound Interest Formula

4-B

for Interest Paid Once a Year

A P (1 APR)Y

A = accumulated balance after Y years P = starting principal APR = annual percentage rate (as a decimal) Y = number of years

Ms. Young

Slide 4-3

4-B

Simple and Compound Interest

Compare the growth in a $100 investment for 5 years at 10% simple interest per year and at 10% interest compounded annually.

The compound interest account earns $11.05 more

than the simple interest account.

Ms. Young

Slide 4-4

4-B

Definitions

Present value is the original principal. Future value is the accumulated amount.

Ms. Young

Slide 4-5

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