6.2B – Compound 6.2B – Compound Interest FormulaInterest Formula

Objective: TSW calculate how much an Objective: TSW calculate how much an investment increases using the compound investment increases using the compound

interest formula.interest formula.

Compound Interest FormulaCompound Interest Formulant

n

rPtA

1)(

Total amount of an investment

Principal (how much did you invest

initially/start amount)

Time (IN YEARS) its invested

The number of times the interest is

compounded per year

Interest rate indecimal form.

Some Key Terms to Help You Some Key Terms to Help You Determine what “n” is:Determine what “n” is:

Annually – once a yearAnnually – once a year Semiannually – twice a yearSemiannually – twice a year Quarterly – 4 times a yearQuarterly – 4 times a year Weekly – 52 times a yearWeekly – 52 times a year Daily – 365 times a yearDaily – 365 times a year Monthly – 12 times a yearMonthly – 12 times a year Bimonthly – 6 times a yearBimonthly – 6 times a year

Examples:Examples:

1.1. Find the final amount of a $400 Find the final amount of a $400 investment after 10 years at an 8% investment after 10 years at an 8% interest compounded annually and daily.interest compounded annually and daily.

2. $1500 at a 4.25% interest rate 2. $1500 at a 4.25% interest rate compounded daily for 30 years.compounded daily for 30 years.

Find the Initial Amount IF:Find the Initial Amount IF:

3. After 12 years, Joe withdraws all his 3. After 12 years, Joe withdraws all his money ($7,000) from his savings account money ($7,000) from his savings account that paid 1.2% compounded bimonthly.that paid 1.2% compounded bimonthly.

Find the initial amount IF:Find the initial amount IF:

4. After 25 years, Gary withdraws all his 4. After 25 years, Gary withdraws all his money from his retirement account money from his retirement account ($25,000) that paid 4.5% compounded ($25,000) that paid 4.5% compounded daily.daily.

Homework!!!!Homework!!!!

pg. 488 #’s 6, 20-23(all)pg. 488 #’s 6, 20-23(all)