Compound Interest Formula:



Pre-Calculus Mrs. Name__________ Date________

Compound Interest Applications

|If a principal of P dollars is borrowed for a period of t years at a per annum interest rate r, expressed in decimals, the interest|

|I charged is |

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|Simple Interest: I = Prt |

|The amount A after t years due to a principal P invested at an annual interest rate r compounded n times per year is |

|Compound Interest Formula: [pic] |

|The amount A after t years due to a principal P invested at an annual interest rate r compounded continuously is |

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|Continuous Compounding: [pic] |

|The present value P of A dollars to be received after t years, assuming a per annum interest rate r compounded n times per year, is|

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|Present Value Formulas: [pic] |

|If the interest is compounded continuously, then [pic] |

|1) Suppose your bank pays 4% interest per annum. If $500 is deposited, how much will you have after 3 years if interest is |

|compounded |

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|a) Annually |

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|b) Monthly |

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|2) Suppose your bank pays 4% interest per annum. If $500 is deposited, how much will you have after 3 years if interest is |

|compounded continuously? |

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|3) How much money should you deposit today in order to have $20,000 in three years if you can earn 6% compounded monthly from a |

|bank C.D.? |

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|4) Find the amount that results from each investment: |

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|a) $100 invested at 4% compounded quarterly after a period of 2 years. |

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|b) $50 invested at 6% compounded monthly after a period of 3 years. |

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|5) Find the principal needed now to get each amount, that is, find the present value. |

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|a) To earn $100 after 2 years at 6% compounded monthly. |

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|b) To earn $75 after 3 years at 8% compounded quarterly. |

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