Interest
Simple versus Compound Interest
Objective
▪ I can define Interest as either “Positive” or “Negative” .
▪ I can explain and calculate Simple or Compound Interest including
using Formulas.
▪ I can determine which type of Interest is better in a scenario.
What is Interest?
Positive • Money paid to you by the
financial institution for your
Savings or Investments.
Interest
Negative • A percentage of money
you pay to the financial
institution when you borrow
Interest money like a loan or credit card.
What is a Principal?
–The Principal is the money deposited,
invested or borrowed.
What is the Rate?
▪ The Rate is fixed percentage that the financial institution pays to or
charges the customer.
What is Interest?
Positive • Money paid to you by the
financial institution for your
Savings or Investments.
Interest
Negative • A percentage of money
you pay to the financial
institution when you borrow
Interest money like a loan or credit card.
What is Simple Interest?
•Interest
based only on
the principal.
Simple
Interest
Finding Simple Interest (Formula)
I=Prt
I represents the interest earned or payed.
P represents the Principal
r represents the interest rate (%) in decimal form.
t represents the time in years (only years).
Example 1: Find Interest Only
▪ Melissa deposited $1,000 in an account that earns 3% simple interest.
She will make no more deposits or withdrawals. How much interest
will Melissa earn at the end of 4 years?
I=Prt
▪ Process:
FORMULA: I=Prt I represents the interest
earned or payed.
▪ SUBSTITUTION: I = (1000)(0.03)(4)
P represents the
▪ SOLVE BY MULTIPLYING: I= 120 Principal
▪ ANSWER: Melissa will earn $120 in interest at the end r represents the interest
of the 4 years. rate (%) in decimal
form.
t represents the time in
years (only years).
Example 2: Find Total Balance including Interest
▪ Melissa deposited $1,000 in an account that earns 3% simple interest. She
will make no more deposits or withdrawals. What will Melissa’s account
balance be at the end of 4 years?
▪ Process:
I=Prt
FORMULA: I=Prt I represents the interest
earned or payed.
▪ SUBSTITUTION: I = (1000)(0.03)(4)
P represents the
▪ MULTIPLY TO FIND THE INTEREST: I= 120 Principal
▪ ADD TO FIND THE BALANCE: $1000 + $120 = $1,120 r represents the interest
▪ ANSWER: Melissa will have an account balance of $1,120 rate (%) in decimal
at the end of the 4 years. form.
t represents the time in
years (only years).
What is Compound Interest versus Simple Interest ?
• Interest based • Interest based
on the principal only on the
and any previous principal.
interest.
Compound Simple
Interest Interest
Finding Compound Interest (Formula)
A=P(1+r) t
A represents the account balance.
P represents the Principal
r represents the interest rate (%) in decimal form.
t represents the time in years (only years).
Example 3: Find Account Balance
▪ Melissa deposited $1,000 in an account that earns 3% interest compounded
annually. She will make no more deposits or withdrawals. What will
Melissa’s account balance be at the end of 4 years?
).
A=P(1+r) t
Process:
FORMULA: A=P(1+r)t
A represents the account
SUBSTITUTION: A=1000(1+0.03)4 balance.
Order of Operations “PEMDAS”; Use Calculator, Round to the P represents the
nearest hundredth place. Principal
▪ ANSWER: Melissa will have an account balance of $1,125.51 r represents the interest
at the end of 4 years. rate (%) in decimal
form.
t represents the time in
years (only years).
Example 3: Find Interest Only
Melissa deposited $1,000 in an account that earns 3% interest compounded
annually. She will make no more deposits or withdrawals. How much interest will
Melissa earn at the end of 4 years?
Process: ).
A=P(1+r) t
FORMULA: A=P(1+r)t
A represents the account
SUBSTITUTION: A=1000(1+0.03)4 balance.
Order of Operations “PEMDAS”; Use Calculator, Round to the nearest hundredth place. P represents the
ACCOUNT BALANCE IS: Melissa will have an account balance of $1,125.51 at the end Principal
of 4 years.
r represents the interest
SUBTRACT THE PRINCIPAL FROM THE ACCOUNT BALANCE TO FIND INTEREST ONLY. rate (%) in decimal
form.
1,125.51 – 1000 = $125.51
t represents the time in
ANSWER: Melissa earned $125.51 in interest at the end of 4 years. years (only years).
Which is better?
▪ If Melissa earned $120 after 4 years with Simple Interest and she
earned $125.51 with interest compounded annually, which type of
interest is better for her savings?
▪ Assume that Melissa has now borrowed (taken out a loan of $1,000).
Using the same calculations from the previous examples….
Melissa owes $120 after 4 years with Simple Interest on the loan
and she owes $125.51 with interest compounded annually on the
loan. Which type of interest charges her the least amount?
Review
▪ Interest can be positive or negative.
▪ There are two types of Interest: Simple or Compound
▪ Formulas:
Simple Interest: I=Prt
Compound Interest: A=P(1+r)t
