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Compound Interest

The document explains the concept of compound interest, including calculations for future value (FV) based on principal (PV), interest rate (r), and number of compounding periods (n). It provides examples of investments with different compounding frequencies, illustrating how interest is calculated and added to the principal over time. Additionally, it includes exercises for practice and a past HSC question related to present value calculations.

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Wendy Schumann
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3 views14 pages

Compound Interest

The document explains the concept of compound interest, including calculations for future value (FV) based on principal (PV), interest rate (r), and number of compounding periods (n). It provides examples of investments with different compounding frequencies, illustrating how interest is calculated and added to the principal over time. Additionally, it includes exercises for practice and a past HSC question related to present value calculations.

Uploaded by

Wendy Schumann
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

FV = PV(1 + r)n

Quick Questions
Shelly invests $19 000 for 2 years at 7% p.a. with interest
compounded annually
(a) calculate the value of the investment on maturity
FV = PV(1 + r)n PV = 19 000
r = 0.07
A = 19 000(1 + 0.07)2
n=2
= $21 753.10
FV = ?
(b) how much interest will she have earned in total?

$21 753.10 - $19 000 = $2753.10


Year 12 Standard Maths Topic 4

INVESTMENTS,
DEPRECIATION & LOANS
Compound Interest
• In compound interest, the interest is added to the
principal at the end of each time period
FV = PV(1 + r)n
Number of
time periods
Future
Value Interest rate
Principal - as a decimal
or
Present
Value
Compound Interest
• Shelly’s account paid compound interest annually
• This means the principal was re-invested at the
beginning of each year
• Interest can compound:
‐ yearly (annually) This means that
the principal is
‐ every 6 months (biannually) re-invested more
‐ quarterly (4 times a year) often and will
therefore grow faster
‐ monthly (12 times a year)
$21 753.10

Compound Interest
Shelly invests $19 000 for 2 years at 7% p.a. with interest
compounded six monthly. 3.5% per 6 month period

Time period Principal Interest


1 - Jan $19 000 19 000 x 0.035 = $665
2 - July $19 665 19 665 x 0.035 = $688.28
3 - Jan $20 353.28 20 353.28 x 0.035 = $712.36
4 - Jul $21 065.64 21 065.64 x 0.035 = $737.30
Final balance $21 802.94

How many compounding periods? 4


Compound Interest
A sum is invested for two years, earning an interest
rate of 12% p.a.
Example 1
$4560 is invested at 10% p.a. over 2 years with interest
compounded six monthly. How much does it grow to?
4 times
The interest will compound __

FV = PV(1 + r)n PV = 4560


r = 0.1 ÷ 2 = 0.05
A = 4560(1 + 0.05)4
n=4
= $5542.71 FV = ?
Example 2
Calculate the future value of an investment of $6000 at
8% p.a. for 2 years with interest compounded
quarterly
8 times
The interest will compound __

FV = PV(1 + r)n PV = 6000


r = 0.08 ÷ 4 = 0.02
A = 6000(1 + 0.02)8
n=8
= $7029.96 FV = ?
Example 3
Jenna invested $5000 and the rate is 12% p.a.
compounded monthly. What will it grow to after 2
years?
The interest will compound 24
__ times

FV = PV(1 + r)n PV = 5000


r = 0.12 ÷ 12 = 0.01
A = 5000(1 + 0.01)24
n = 24
= $6348.67 FV = ?
We are finding the present value of the investment

Example 4
What amount must I invest at 14% p.a. compounding
quarterly to have $1700 in 3 years?

12 times
The interest will compound __

FV = PV(1 + r)n PV = ?
1700 = PV(1 + 0.035)12 r = 0.14 ÷ 4 = 0.035
n = 12
1700
= PV FV = 1700
(1 + 0.035)12

P = $1125.03
Past HSC Question

20 times
The interest will compound __

FV = PV(1 + r)n PV = ?
60 000 = PV(1 + 0.01)20 r = 0.04 ÷ 4 = 0.01
n = 20
60 000
= PV FV = 60 000
(1 + 0.01)20

PV = $49 172.67
10% pa compounding quarterly

10% pa compounding annually

5% pa compounding annually
Activity
Exercise 1B (p.12)
Questions: 5
6–ac
12 – a c
19*
21*
Remember to mark
your work

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