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Simple and Compund Interest

Simple interest is calculated on the principal only, while compound interest is calculated on the principal and accumulated interest over time. Compound interest results in a higher total amount than simple interest due to interest earning interest. For example, $1,000 invested at 7% interest compounded annually would be worth $2,207.37 after 30 years, while the same principal and interest rate with simple interest would only be worth $3,100. The more frequently interest is compounded, the greater the overall return compared to less frequent or no compounding.

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453 views42 pages

Simple and Compund Interest

Simple interest is calculated on the principal only, while compound interest is calculated on the principal and accumulated interest over time. Compound interest results in a higher total amount than simple interest due to interest earning interest. For example, $1,000 invested at 7% interest compounded annually would be worth $2,207.37 after 30 years, while the same principal and interest rate with simple interest would only be worth $3,100. The more frequently interest is compounded, the greater the overall return compared to less frequent or no compounding.

Uploaded by

Rayezeus Jaiden Del Rosario
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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SIMPLE & COMPOUND

INTEREST

QUARTER 2, GENERAL MATHEMATICS


Simple Interest
Compound Interest
What is an Interest and how does it
work?
Interest is the “rent” that a borrower pays a lender
to use the lender’s money.
“Money makes money, and the money
that money makes, makes more money.”
Benjamin Franklin

There are basically TWO types of Interest.


They are:
 Simple Interest
 Compound Interest
SIMPLE
INTEREST
IMPLE INTEREST
DEFINITION

Interest paid on the principal only


and NOT on any accumulated interest
REMEMBER

Simple interest is a type of interest that is


paid only on the original amount deposit
and not on past interest paid.
Simple interest: I=prt

I = interest
p = principal: amount you start with
r = rate of interest
t= time in years
IMPLE INTEREST
FORMULA

Interest paid Annual interest rate

I = PRT Time (in


years)

Principal
(Amount of
money invested
or borrowed)
If you invest $3,000 at 5% for one year, how much
will you make for the year?

I = prt
= 3000  0.05  1
= 150
You made $150 for the year.
enter in formula
as a decimal I = PRT
I = (200)(0.04)(1.5)
I = $12
Solving for Time
If you invested $300.00 in an account that paid
simple interest, find how long you’d need to
leave it in at 2% interest to make $15.00.
enter in formula
as a decimal I = PRT

15 = (300)(0.04)T
1.25 yrs = T
Maturity Value

The Value of an asset at a specific


date
Variables for Maturity Value

Future Value

Amount
Calculating Maturity Value
Example

S = Principal + Interest
S= P+I
S = P + PRT
S = 200 + (200)(.04)
(1.5)
S = 200 + 12 S = $212
Calculating Maturity Value
Example

S = P(1+rt)
S=
200(1+.04•1.5) S =
200(1.06)
S = $212
Want to Be a Millionaire?
You Can!
If you leave your money to grow for a long time,
P1000 can turn into a million pesos. No, seriously.

How?

Through compounding.
COMPOUND
INTEREST
Compound Interest
Compounding interest is "interest on interest."
It is a method of calculating interest where the
interest is added to the original principal.

This new value is now our principal for the


next time period. In this method the interest
earned in past terms can earn interest in
future terms.
Compound vs Simple Interest
INTEREST ing Comparison : P=1000; r=7%

Period/years Simple Interest Compound Interest


0 1.000,00 1.000,00
1 1.070,00 1.070,00
2 1.140,00 1.144,90
3 1.210,00 1.225,04
4 1.280,00 1.310,80
5 1.350,00 1.402,55
6 1.420,00 1.500,73
7 1.490,00 1.605,78
… …
P= 1000; r =7%
Period/years Simple Interest Compound Interest
23 2.610,00 4.740,53
24 2.680,00 5.072,37
25 2.750,00 5.427,43
26 2.820,00 5.807,35
27 2.890,00 6.213,87
28 2.960,00 6.648,84
29 3.030,00 7.114,26
30 3.100,00 7.612,26
Simple and Compound Interest Graph
So, after this ,
 Would you rather earn compound
or simple interest?

 Would you rather pay compound


or simple interest?
Time is on Your Side
 The longer you save, the greater the
effect of compound interest.

But also…

 The longer you borrow, the quicker


your debts grow.
Compounding Periods

When calculating compound interest, the


number of calculating periods makes a
significant difference.
The basic rule is that the higher the
number of calculating periods, the greater
the amount of compound interest.
A bank may pay interest as follows:
 Semi-annually: twice a year or every 180 days
 Quarterly: 4 times a year or every 90 days
 Monthly: 12 times a year or every 30 days
 Daily: 360 times a year
Compound Interest Formula
Check your understanding

Find the future value of 1000 invested for 10


years at 7% interest :

a. compounded annually
b. compounded semi-annually
c. compounded quarterly
d. compounded daily
At the end…

Have a nice day!

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