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?

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

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