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Compound Interest: Equations and Examples, Study notes of Advanced Accounting

Mansfield University of Pennsylvania (MU)Advanced Accounting

Equations and examples to help understand compound interest, including how to calculate account balances after different periods of time and the impact of various compounding frequencies. Students will learn how to calculate compound interest for different investment amounts and interest rates, as well as compare the effects of different compounding frequencies.

Typology: Study notes

2021/2022

Uploaded on 09/12/2022

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Aim #82 : What is compound interest?
Homework : Handout
Do Now : Kyra invested $15,000 of her money at a 1.8% per year bank rate. Write
an equation that represents Kyra's account balance after t years. What is Kyra's
account balance, to the nearest cent, after:
Year 1?
Year 2?
Year 3?
Year 4?
Year 5?
-Compounded interest adds interest not only to your principle amount, but your
accumulated interest over time.
-To calculate compound interest we use the formula below where A = total balance
after t years, P = principal amount (amount borrowed or invested), r = interest
rate (decimal form), and t = time in years.
A = P(1 + r)
t
1) Jack has $500 to invest. The bank offers an interest rate of 6% compounded
annually.
a) How much money will Jack have after 1 year?
b) How much money will Jack have after 5 years?
c) How much money will Jack have after 10 years?
pf3
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Download Compound Interest: Equations and Examples and more Study notes Advanced Accounting in PDF only on Docsity!

Aim #82: What is compound interest? Homework: Handout Do Now: Kyra invested $15,000 of her money at a 1.8% per year bank rate. Write an equation that represents Kyra's account balance after t years. What is Kyra's account balance, to the nearest cent, after: Year 1? Year 2? Year 3? Year 4? Year 5? -Compounded interest adds interest not only to your principle amount, but your accumulated interest over time. -To calculate compound interest we use the formula below where A = total balance after t years, P = principal amount (amount borrowed or invested), r = interest rate (decimal form), and t = time in years.

A = P(1 + r)

t

  1. Jack has $500 to invest. The bank offers an interest rate of 6% compounded annually. a) How much money will Jack have after 1 year? b) How much money will Jack have after 5 years? c) How much money will Jack have after 10 years?
  1. Suppose you go to the bank and invest $6,000. Find the account balance to the nearest cent after 15 years paying 4%: a) compounded annually b) compounded semi-annually c) compounded quarterly d) Based on your previous answers for parts a through c, would you rather invest your money annually, semi-annually or quarterly?
  2. You have $200 to invest for 10 years. Is it monetarily better to invest your money in a bank that pays 4.05% interest compounded annually or 4% interest compounded quarterly? To calculate the total amount of money compounded monthly or quarterly we use the formula below where n = number of timesinterest is compounded per year. r n

A = P(1 + )

nt

  1. Joe wants the money he deposits in an account to amount to $3000 at the end of three years. If the annual interest rate is 4.2%, how much money, to the nearest cent, should he deposit when: a) interest is compounded annually b) interest is compounded semi-annually c) interest is compounded monthly
  2. Suppose you needed $21,000 in 5 years. You want to invest at 2.4% interest, compounded monthly. How much should you invest? Sum it Up! Compound Interest – Interest is calculated once per period on the current amount borrowed or invested. Each period, the interest becomes a part of the principal.
  3. Suppose that you plan to need $10,000 in thirty-six months' time when your child starts attending university. You want to invest at a bank that offers 3.5% interest, compounded semi-annually. How much should you invest?
  4. Craig invested $600 in a savings account at a % annual interest rate. He made no deposits or withdrawals on the account for 2 years. The interest was compounded annually. Find, to the nearest cent, the balance in the account after two years.