Mel3e and mel4e
Unit 4 – Lesson 4: Compound InterestBefore we talk about compound interest, we are going to review a few key financial terms.___________________ - the value of the initial investment or loan___________________ - the final or future value of an investment, including the principal and the accumulated interest___________________ - the interest paid on the principal and its accumulated interest___________________ - the length of time for which interest is calculated before being accumulatedThe formula for compound interest is:A=P1+inWhere…P is the principal, or initial valueA is the accumulated amount or future valuei is the interest rate PER compounding periodn is the number of compounding periods*Note: The interest rate per compounding period, i, is the yearly interest divided by the number of compounding periods and n is the total number of compounding periods over the given time frame. In order to calculate i and n correctly, use the following conversion chart:Compounding PeriodMeaningInterest rate, iTerm, nAnnuallyOnce per yearUnchangedNumber of yearsSemi-annuallyTwice per yearRate divided by 2Number of years x 2QuarterlyFour times per yearRate divided by 4Number of years x 4MonthlyTwelve times per yearRate divided by 12Number of years x 12Let’s try some examples!Example 1: Interest Compounded Semi-AnnuallyDetermine how much money you will have if $500 is invested for six years, at 4% per year, compounded semi-annually.Example 2: Interest Compounded MonthlyAlyse borrowed $5000 to start a small business. The interest rate on the loan was 9% per year, compounded monthly. She is expected to repay the loan in full after four years. a) How much must Alyse repay? b) How much of the amount Alyse repays will be interest? ................
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