Escolar Documentos
Profissional Documentos
Cultura Documentos
1 Compound Interest
Simple interest interest is paid only on the
principal
Compound interest interest is paid on both
principal and interest, compounded at regular
intervals
Example: a $1000 principal paying 10% simple
interest after 3 years pays .1 3 $1000 = $300
If interest is compounded annually, it pays .1
$1000 = $100 the first year, .1 $1100 = $110
the second year and .1 $1210 = $121 the third
year totaling $100 + $110 + $121 = $331 interest
Interest
Credited
Times
Credited
per year
Rate per
compounding
period
Annual
Semiannual
year
1
6 months 2
Quarterly
quarter
R
4
Monthly
month
12
R
12
R
R
2
M P (1 i )
and
I M P
n
(1 i )
(1.05)10
2010
$1000
2020
$1000(1 i ) n
$1000(1.05)10
monthly:
i 1012% .833%, n 12 2 24
M P(1 i ) n $32000(1.00833) 24 $39052.20
I M P $39052.20 $32000 $7052.20
M P(1
i 365 n
365
and
I M P
M Pe
yr
2010
$1000
2020
$1000e yr
$1000e10 (.05)
M P(1
i 365 n
365
$2900(1
$4781.13
5% 3650
365
M Pe $1200 e
$2893.08
I M P $2893.08 $1200
$1693.08
yr
M P (1 365 )
.5% 365
$6000(1 3365
)
$6210.73
2 1(1 6%) n
2 (1.06) n
If you try different values of n on your calculator,
the value that comes closest to 2 is 12. Therefore
the investment doubles in about 12 years.
8% 4 5
4
P 1.02
20
3800
P
$2557.29 $3800 in 5 years
20
(1.02)
1 i n 1
S R
R sn i
i
$196,694.12
I 196,694.12 (25 2000) $146,694.12
$50,000 R
7%
2
50,000 20.97103R
50000
R
$2384.24
20.97103
1.03516 1
0
.
035
$21,000 $1500
10%
2
21,000
1.05 1
14
1500
0
.
05
1.05 n 1
1500
0
.
05
$221,681.19
1 i n 1
A R
R an i
n
i 1 i
3000
40
.0671266
.0251.025
$75,263.64
i
1
R S
S
n
sn i
1 i 1
.035
2
2
i
.035
R S
$4850
n
15
(
1
.
035
)
1
$251.35
.035, n 2 25 50
2
2
1.035 50 1
4.584927
A 12,000
12
,
000
50
0.195472
.0351.035
$281,468.06
.04, n 30 2 60
2
2
i
.04
RS
281,468.06
n
1 i 1
1.04 60 1
.04
281,468.06
$1182 .69
9.519627
Payment
$150
November 30
$84.50
5.
$125
$775 24
$32
$24.62
12
( 2)
$100
1
24.62
100 7.14
345
1.
Principal
Interest
Time in days
Partial payments
$5800
10%
120
$2500 on day 60
60
$96.67
360
2.
3.
Example(continued)
Interest due at maturity:
60
I PRT $3396.67 0.10
$56.61
360
Total interest paid on the note (add interest paid to interest due at
3396.67 56.61 $3453.28
maturity):
P 1 P
i 1 i
so R A
n
1 i 1
n
4
(
1
.
09
)
$1080.34
.01
12
12
.01(1.01) 24
R $4800
$229.95
24
(1.01) 1
f .c. 24 225.95 4800 $622.80