1-6 COMPARING SIMPLE INTEREST TO COMPOUND YEARLY INTEREST

SIMPLE INTEREST: THE BALANCE AND THE INTEREST AMOUNT NEVER CHANGE

COMPOUND INTEREST: AT THE END OF EACH TIME PERIOD, INTEREST IS CALCULATED AND ADDED TO THE ORIGINAL AMOUNT.

LET'S SEE AN EXAMPLE

THE TERMS ARE INITIAL AMOUNT $1000

INTEREST RATE IS 5.9%

TIME IS 5 YEARS

ORIGINAL AMOUNT(PERCENTAGE AS A DECIMAL)MULTIPLIED BY TIME THEN ADD THAT TO THE ORIGINAL AMOUNT

$1000(.059)TIMES 5

1000(.059)= $59 SO, INTEREST IS $59 EACH YEAR

MULTIPLY THAT BY 5 YEARS AND TOTAL INTEREST OR FINANCE CHARGE IS $295

IF THIS WAS A LOAN, WE WOULD PAY BACK THE ORIGINAL $1000 PLUS $295 IN INTEREST FOR A TOTAL OF $1295.

FUTURE AMOUNT =

 $FV=1000\left(1+.059\right)^5$  

FV= 1331.93

1331.93 - 1000=331.93 IN INTEREST

SIMPLE INTEREST WAS 295.  

IF YOU COMPOUND YEARLY VS SIMPLE, THE INTEREST DIFFERENCE IS 331.93 - 295=36.93   $36.93

GET YOUR QUIZIZZ ASSIGNMENT FROM CANVAS OR CHAT