Personal Finance Math

Compound Interest

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​Watch a Video

https://www.cnbc.com/video/2019/05/17/compound-interest-how-it-works-and-how-to-calculate-it.html

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​Compound: Interest earns more interest

​Simple: Only original amount earns interest

Simple Interest

Only amount invested is charged / earns interest 

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​This is ONLY the interest that you earned.

​To see total amount paid back need to add Principal back in

​ A=P+(P*R*T)

Multiple Choice

You invest $100. You earn 5% for 2 years. How much interest have you earned?

• $5

• $10

• $10.25

• $110

Multiple Choice

You invest $200 for 2 years earning 5% in a bond. What is the total amount you will get paid back when it reaches maturity.

• $20

• $20.50

• $220

• $220.50

Compound Interest

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Is the interest on a loan or deposit calculated based on both the initial principal and the accumulated interest from previous periods

Will often just look up a calculator:  https://www.investor.gov/financial-tools-calculators/calculators/compound-interest-calculator

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​If doing the math on your phone

​Please remember your order of operations

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​May be easiest if you

​1. Figure out your periodic rate or the rate charged per period

This is i/n

​2. Add in the 1

​3. Do the exponent (already have n*t calculated)

​4. Times the principle

Compound Interest with Regular Contributions Formula

We will NOT do this - even our easier formula you can use an online calulator, but should understand the parts

Multiple Choice

If my investment compounds monthly n would equal

• 2

• 4

• 12

• 365

Multiple Choice

If I am earning 12% and my investment compounds quarterly what would my periodic rate be (rate charged per period or i/n)

• 12%

• 4%

• 3%

• 1%

Multiple Choice

If my investment compounds semi-annually and I leave it for 4 years, how many times would it compound?

• 2

• 4

• 8

• Cannot tell

Multiple Choice

If I invested$100 in an account that compounds annually, earns 2%, and I left it for 5 years what would the formula look like

• 100*.02*5

• 100(1+.2/1)^(5*1)

• 100(1+.02/1)^(5*1)

• 100(1+.02/5)^(5*1)

Multiple Choice

Same information from last slide: If I invested $100 in an account that compounds annually, earns 2%, and I left it for 5 years what would I end up with? Formula: P(1+i/n)^(nt)

• $100

• $110

• $110.41

• Cannot tell

Multiple Choice

If I invested $100 in an account that earns 12%, compounding monthly and I left it for 30 years what would I end up with? Formula: P(1+i/n)^(nt)

• 360

• 460

• 3,594.96

• 35,94.96

​If you need another lecture

​Watch something like:

​ https://www.youtube.com/watch?v=OQ9Mv2jwQWo

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