1-6 COMPARING SIMPLE INTEREST TO COMPOUND YEARLY INTEREST

1-6 COMPARING SIMPLE INTEREST TO COMPOUND YEARLY INTEREST

WHAT'S THE DIFFERENCE

• SIMPLE INTEREST: THE BALANCE AND THE INTEREST AMOUNT NEVER CHANGE

• COMPOUND INTEREST: AT THE END OF EACH TIME PERIOD, INTEREST IS CALCULATED AND ADDED TO THE ORIGINAL AMOUNT.

• LET'S SEE AN EXAMPLE

WE WILL COMPARE SIMPLE INTEREST TO COMPOUND

• THE TERMS ARE INITIAL AMOUNT $1000

• INTEREST RATE IS 5.9%

• TIME IS 5 YEARS

SIMPLE INTEREST

• ORIGINAL AMOUNT(PERCENTAGE AS A DECIMAL)MULTIPLIED BY TIME THEN ADD THAT TO THE ORIGINAL AMOUNT

• $1000(.059)TIMES 5

• 1000(.059)= $59 SO, INTEREST IS $59 EACH YEAR

• MULTIPLY THAT BY 5 YEARS AND TOTAL INTEREST OR FINANCE CHARGE IS $295

• IF THIS WAS A LOAN, WE WOULD PAY BACK THE ORIGINAL $1000 PLUS $295 IN INTEREST FOR A TOTAL OF $1295.

Multiple Choice

1) Gabby invested $100 into a savings account that earned simple interest at a rate of 1.5%.  She plans to keep the money in the account for the next ten years.  How much would she have in the account at the end of ten years?

• $15
• $115       
• $116.05
• $1,500

COMPOUND INTEREST

• FUTURE AMOUNT =

   $PRESENT\ AMOUNT\left(1+r\right)^T$  

•  $FV=1000\left(1+.059\right)^5$  

• FV= 1331.93

• 1331.93 - 1000=331.93 IN INTEREST

• SIMPLE INTEREST WAS 295.  

• IF YOU COMPOUND YEARLY VS SIMPLE, THE INTEREST DIFFERENCE IS 331.93 - 295=36.93   $36.93

Multiple Choice

3)  Jose invests $200 into an account at a rate 2%.  He plans on keeping the account open for 15 years.  If it is a compound interest account, about how much money will he have in the account after 15 years?

• $60         
• $70
• $260       
• $270

Multiple Choice

Anne deposited $500 in an

account that earns 6% simple annual interest.

Shelly deposited $500 in an account that earns 6% annual interest

compounded annually. They leave the

money in the account for 4 years. Which

statement is true about the two investments after 4 years?

• Shelly will have $131.24 more in her account

  than Anne has in her account.

• They will have the same

  amount in their accounts.

• Shelly will have $11.24 more

  in her account than Anne has in her account.

• Anne will have $11.24 more in

  her account than Shelly has in her account.

YOUR TURN

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