Understanding Compound Interest

This lesson covers how to calculate compound interest using an investment model. It begins with a problem involving a $5,000 investment at 6% interest compounded annually over 18 years. Key terms like principal and interest rate are explained. The lesson distinguishes between simple and compound interest, highlighting the exponential growth of compound interest. A step-by-step calculation is demonstrated, leading to a general formula for compound interest. The formula is applied to a new problem, reinforcing the concept.

What happens to the interest earned each year when using compounded interest?

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How does the principal amount affect the interest earned over time?

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Calculate the total amount in an account after 18 years if $5,000 is invested at 6% compounded annually.

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