INTEREST

Simple | Compound | End of Page

Simple Interest

Example 1 | Example 2

The amount of simple interest is determined by the formula I = Prt
where:
I is the amount of interest earned (in dollars)
P is the principal sum of money earning interest (in dollars)
r is the annual interest rate (a decimal)
t is the time period (in years)
Examples:
1. Ross just sold his old computer for \$750 and had decided to put the money in a bank that is paying 9.25% interest. If he leaves his money for 4 years how much interest will he have made?
a) Convert r to a decimal
9.25% ------> 0.0925
b) Use the interest formula to solve for I
I = Prt
I = (\$750)(0.0925)(4)
I = \$277.50
Ross will have earned \$277.50 in interest in the four years.

2. 250 days ago, Olga invested some money that she has been saving for a trip to Columbia. If she earned \$256.25 in interest at a rate of 10.25 %, how much money did she originally invest?
a) Manipulate the simple interest formula to solve for P
 I=Prt -------> P = _I_ rt
b) Convert r to a decimal
10.25% ------> 0.1025
c) Convert t into years
 250 Days -------> 250 365
d) Use your formula to solve for P
 P = _I_ rt
 P = _(\$ 256.25)_ (0.0125) (250) (365 )
P =\$ 3650.00
Olga originally invested \$3650.00

Mini Lessons

Compound Interest

Example 1 | Example 2

The amount of compound interest is determined by the formula
 A = P(1 + i) n
Where:
A is the accumulated value (in dollars)
P is the principal (in dollars)
i is the periodic interest rate (a decimal)
n is the number of compounding periods
Examples:
1. Rebecca is a seamstress who just opened her first shop. She has decided to invest her first \$2000 in an account for her retirement where interest is compounded annually at 10.5%. If Rebecca plans to work for 35 years, how much money will she have in that account when she retires?
a) Convert r to a decimal
10.5% ------> 0.105
b) Use the formula to solve for A
 A = P(1 + i) n
 A = \$2000(1 + 0.105) 35
 A = \$2000(1.105) 35
 A = \$2000(32.9367)
 A = \$65 873.35
When Rebecca retires in 35 years, she will have \$65 873.35 in her account.

2. Keith wants to buy a grand piano when he finishes his masters degree in 3 years. He has found a bank that will give him an interest rate of 12% compounded annually. If he will need \$15 000 for the piano, how much does he need to invest now?
a) Convert r to a decimal
12% ------> 0.12
b) Change the formula to solve for P
 A = P(1 + i) n
 P = ____A___ (1 + i ) n
c) Solve the equation for P
 P = _\$15 000 (1+0.12) 3
 P = _\$15 000 (1.12 ) 3
 P = \$15 000 1.4049
 P = \$ 10 0676.70

Keith will need to invest \$ 10 0676.70 now if he wants to have \$15 000 in 3 years.
Top of Page
Mini Lessons