1 / 58

Compound Interest Formulas and Examples for Financial Calculations

Understand compound interest terms, formulas, and practical examples to calculate account balances over time. Learn how to invest money wisely using APR, principal, and compounding frequency for financial planning.

amy
Download Presentation

Compound Interest Formulas and Examples for Financial Calculations

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. 11-2 Terms to be familiar with…

  2. Interest

  3. Interest • Money charged for the use of money

  4. Principal

  5. Principal • The amount of money initially invested

  6. Account Balance

  7. Account Balance • Amount of money in the account at a given time

  8. Interest Rate

  9. Interest Rate Percent charged annually a.k.a. APR

  10. Compound Interest

  11. Compound Interest • Interest charged on interest

  12. Number of times interest is usually compounded

  13. Number of times interest is usually compounded

  14. Number of times interest is usually compounded

  15. Number of times interest is usually compounded

  16. Number of times interest is usually compounded

  17. Number of times interest is usually compounded

  18. Number of times interest is usually compounded

  19. Number of times interest is usually compounded

  20. Compounded Interest Formula • A = • P = • n = • t = • r =

  21. Compounded Interest Formula • A = Account Balance • P = • n = • t = • r =

  22. Compounded Interest Formula • A = Account Balance • P = Principal • n = • t = • r =

  23. Compounded Interest Formula • A = Account Balance • P = Principal • n = number of times in year interest is compounded • t = • r =

  24. Compounded Interest Formula • A = Account Balance • P = Principal • n = number of times in year interest is compounded • t = time in years • r =

  25. Compounded Interest Formula • A = Account Balance • P = Principal • n = number of times in year interest is compounded • t = time in years • r = annual percentage rate (as a decimal)

  26. Compounded Interest Formula A = P(1 + r/n ) (nt)

  27. Example1 • $1200 is invested at an APR of 9%. Find the balance in five years if the interest is compounded • a) quarterly b) monthly

  28. $1200 is invested at an APR of 9%. Find the balance in five years if the interest is compounded a) quarterly A = P = r = n = t =

  29. $1200 is invested at an APR of 9%. Find the balance in five years if the interest is compounded a) quarterly A = ??? P = 1200 r = .09 n = 4 t = 5

  30. A = 1200(1 + .09/4)(4∙5)

  31. A = $1872.61

  32. $1200 is invested at an APR of 9%. Find the balance in five years if the interest is compounded b) monthly A = P = r = n = t =

  33. $1200 is invested at an APR of 9%. Find the balance in five years if the interest is compounded b) monthly A = ???? P = 1200 r = .09 n = 12 t = 5

  34. A = 1200(1 + .09/12)(12∙5)

  35. A = $1878.81

  36. Example2 • I would like to create a trust fund for my daughter that she can have in 18 years for college. I have $10,000 to invest. Which account would have a greater balance, one earning an APR of 6% compounded semiannually or one that earns an APR of 5.5% compounded daily?

  37. 6% compounded semiannually A = P = n = t = r =

  38. 6% compounded semiannually A = ??? P = 10,000 n = 2 t = 18 r = .06

  39. A = 10000(1 + .06/2)(2∙18)

  40. A = $28,982.78

  41. 5.5% compounded daily A = P = n = t = r =

  42. 5.5% compounded daily A = ??? P = 10,000 n = 365 t = 18 r = .055

  43. A = 10000(1 + .055/365)(365∙18)

  44. A = $26,910.33

  45. Example 3 • I would like to retire with a balance of $100,000 in an annuity. Find the amount of money to invest initially (principal) if I want to retire in 30 years and I can invest at an APR of 7% compounded weekly.

  46. 7% compounded weekly A = 100,000 P = ??? n = 52 t = 30 r = .07

  47. 100000 = P(1 + .07/52)(52∙30)

  48. 100000 = P (1 + .07/52)(52∙30)

  49. $12,262.95 = P

  50. Example 4 • At what interest rate do I need to invest $10,000 to double its value in 10 years if interest is compounded quarterly?

More Related