2.5 Compound Interest Formula

Financial Algebra Second Edition

Slide 2

Bellwork:


Write the Compound Interest Formula:

​P = principal
r = rate (in decimal)
n = how many times is calculated (compounded) in 1 year
t = time, in years, desired time of calculated interest

Financial Algebra Second Edition

Slide 1

2-5: Compound Interest Formula

Learning Goals

The students will be able to:

• Understand the derivation of the compound interest formula.

• Make computations using the compound interest formula.

Multiple Choice

Rico deposits $800 at 1.87% interest, compounded quarterly. What is his ending balance after 1 year? Round to the nearest cent.
( P = 800, r = 0.0187, n = 4, t = 1 )

• The ending balance after 1 year is $825.75.
• The ending balance after 1 year is $820.25.
• The ending balance after 1 year is $810.50.
• The ending balance after 1 year is $815.07.

Multiple Choice

Nancy deposits $1,200 into an account that pays 1.7% interest, compounded monthly. What is her ending balance after 1 year? Round to the nearest cent.

• $1,220.56

• $1,205.60
• $1,230.75
• $1,220.50

Multiple Choice

Marie deposits $1,650 for 3 years at 1% interest, compounded daily. What is her ending balance?

• $1,600
• $1,725.00

• $1,700.00

• $1,700.25

Financial Algebra Second Edition

Slide 14

Example 4:
Sharon deposits $8,000 in a 1-year CD at 2% interest, compounded daily. What is Sharon’s annual percentage yield (APY) to the nearest hundredth of a percent?

Financial Algebra Second Edition

Slide 15

Solution:

Find the APY using the compound interest formula and the simple
interest formula.

Subtract the principal from the new balance.

Use the simple interest formula.

The annual percentage yield is 2.02%

​

​

​I=Prt

Multiple Choice

Barbara deposits $3,000 in a 1-year CD at 1.1% interest, compounded daily. What is the APY to the nearest hundredth of a percent?

• 1.11%
• 3.25%
• 0.75%
• 2.5%

Financial Algebra Second Edition

Slide 14

Classwork:
To turn in today.

Textbook - left side panel

Applications 2-5a
2-5b