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Understanding Compound Interest Basics

The document explains the concept of compound interest, distinguishing it from simple interest and providing formulas for calculating both. It includes various exercises for calculating compound interest based on different principal amounts, interest rates, and time periods. Additionally, it presents scenarios involving savings accounts, investments, loans, and debt repayment to illustrate the application of compound interest calculations.

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Nan May Thazin Nan May Thazin
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11 views4 pages

Understanding Compound Interest Basics

The document explains the concept of compound interest, distinguishing it from simple interest and providing formulas for calculating both. It includes various exercises for calculating compound interest based on different principal amounts, interest rates, and time periods. Additionally, it presents scenarios involving savings accounts, investments, loans, and debt repayment to illustrate the application of compound interest calculations.

Uploaded by

Nan May Thazin Nan May Thazin
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

SI

total-principal

tptal-principal
What is Compound Interest?

If you walk into a bank and open up a savings account you will earn interest on the money
you deposit in the bank. If the interest is calculated once a year then the interest is
called “simple interest”. If the interest is calculated more than once per year, then it is
called “compound interest”.

Compound Interest Formula


𝑟
𝐶𝐼 𝑃 1 𝑃
100
Where, CI = compound interest

P = the principal (amount originally borrowed)

r = interest rate

t = number of years

Investment or future value of the deposit,


𝑟
𝐶𝐼 𝑃 1
100
To calculate the compound interest paid more than once a year we use,
𝑟
𝐶𝐼 𝑃 1
100
Where, n = the number of times the interest is compounded per year

Exercise

1. You deposit $2000 in a savings account at Hometown Bank, which has a rate of 6%.
(a) Find the amount of money in the account after 3 years subject to compound interest.
(b) Find the interest.
2. Maria invests $1200 at 6% compound interest. Work out the value of the investment after:
(a) One year
(b) Two years
(c) Three years
3. Luka invests $8000 at 6% compound interest.
(a) How much is his investment worth after three years?
(b) How much interest has he earned after three years?
4. A shipping company borrows $70 million at 5% p.a. compound interest to build a new cruise
ship. If it repays the debt after 3 years, how much interest will the company pay?
5. A woman borrows $100000 for home improvements. The compound interest rate is 15%
p.a. and she repays it in full after 3 years. How much interest will she pay?
6. A man owes $5000 on his credit cards. The APR is 20%. If he doesn’t repay any of the
debt, how much will he owe after 4 years?
7. p8 million tonnes of fish were caught in the North Sea in 2012. If the catch is reduced by
t
r 20% each year for 4 years, what weight is caught at the end of this time?
8. Find the compound interest paid on a loan of $600 for 3 years at an annual percentage
rate (APR) of 5%.
9. You deposit $7500 in a savings account that has a rate of 6%. The interest is compounded
monthly.
(a) How much money will you have after five years?
(b) Find the interest after five years.
10. Find the compound interest when $3000 is invested for 18 months at an APR of 8.5% if
the interest is calculated every 6 months.

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