SIMPLE INTEREST VS COMPOUND INTEREST
嚜燐BF3C 每 Compound Interest
Date: _________________________
COMPOUND INTEREST
REVIEW
Simple Interest
? Interest paid on ONLY the ______________________ of an investment or loan.
? Has a _____________________ growth.
Compound Interest
? Interest paid on the __________________ AND it*s accumulated __________________.
? Calculated at regular compounding _____________________ and _________________ to
the principal for the next compounding period.
? Has ________________________ growth.
COMPOUND INTEREST FORMULA
A = P (1 + i)
n
A = _____________________________________ (or future value)
P = _______________________ (the initial amount)
i = ____________________________ per ________________________ period
n = number of ________________________ periods
Compounding Frequency Terminology
? Annually 每 once a year
? Semi-annually 每 ________ times per year (every 6 months)
? Quarterly 每
________ times per year (every 3 months)
? Semi-monthly 每 ________ times per year (twice a month)
? Bi-weekly 每
________ times per year (every 2 weeks)
? Weekly 每
________ times per year (but NOT 4 times a month)
Interest Rate (i)
Calculate the interest rate (i) as it would appear in the compound interest formula.
(Hint: Convert to decimal and divide by the number of compounding periods)
a) 6% semi-annually
b) 5% weekly
c) 1.75% quarterly
Compounding Periods (n)
Calculate the number of compounding periods (n) as it would appear in the compound interest
formula. (Hint: multiply the length of time (in years) by the # of compounding periods in the compounding frequency)
a) Compounded quarterly
for 5 years
b) Compounded semi-annually
for 18 months
Adapted from OAME Support Resources for MBF3C 每 Personal Finance
c) Compounded bi-weekly
for 8 months
MBF3C 每 Compound Interest
Date: _________________________
EXAMPLE 1
a) Calculate the amount of a $500 investment, invested at 3% compounded quarterly for 3 years.
b) How much interest was earned?
EXAMPLE 2
Peter borrowed $5 000 to buy a used car? The interest rate on the loan was 5.45% per year,
compounded monthly. He plans to repay the loan in four years.
a) How much must Peter repay?
b) If Peter repays the loan 6 months early, how much interest will he save (not have to repay)?
EXAMPLE 3
Jennifer*s investment has grown by an average of 12.6% per year, compounded annually, over the
past seven years. How much would her investment of $2000 made eight years ago be worth today?
3 RULES OF THUMB FOR CALCULATING COMPOUND INTEREST
? Always identify the value of each variable first.
? Remember to use BEDMAS
? Keep all decimal places in your calculator and round to 2 decimal places at the end.
Adapted from OAME Support Resources for MBF3C 每 Personal Finance
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