Made by S. Campbell

1. COMPOUND
INTEREST

2. WHAT IS
COMPOUND
INTEREST ALL
ABOUT?
In compound interest,
interest is paid on the
principal and
accumulated interest

3. Further
Explanation
 In compound interest,
the interest is added to
the principal at the end
of each period and the
amount thus obtained
becomes the principal
for the next period. The
process is repeated till
the end of the specified
time.

4. Difference between simple interest and
compound interest
Simple Interest
 Simple interest
calculates the total
interest payment
using a fixed
principal amount
Compound interest
 Compound interest
calculates the total
interest payment
using a variable
principal amount.

5. Example 1: Susan puts $20,000 in a
savings account paying 8% annual
interest compounded
annually. How much money will be in
the account after 3 years?

6. Simple interest for the first year at 8%=
Principal x Interest Rate ( as a decimal)
= $20, 000 x 0.08
= 1,600
New principal= original principal + interest
= $20,000+ 1,600
=$21, 600
Now we can find the interest for the second
year
Finding the Interest for the First year

7. Finding the Interest for the second year
REMEMBER THAT THE
NEW PRINCIPAL IS NOW
$21600
Simple interest for the second year= $21, 600 x
0.08
= $1,728
New principal= original principal + interest
= $21,600+ 1,728
=$23,328
Now we can find the interest for the third
year

8. Simple interest for the third year= $23, 328 x 0.08
= $1,866.24
Finding the Interest for the second year
New principal= original principal + interest
= $23,328+ 1,866.24
=$25, 194.24

9. Principal at the
beginning of
the year
Interest
Balance at the end of
the year
Year 1: 20,000
I= 20000 x 0.08
I= 1, 600
$21, 600
Year 2: 21,600
I= 21, 600 x 0.08
I= 1, 728
$23, 328
Year 3: 23, 328
I= 23, 328 x 0.08
I= 1, 866.24
$25 194.24
A table can also be used to obtain the same information

10. Example 2:
Find the compound
interest on $260,000
invested for 2 years
at 5% per annum

11. Principal at the
beginning of
the year
Interest
Balance at the end of
the year
Year 1: $260, 000
I= $ 260, 000 x 0.05
I= $13, 000
$273, 000
Year 2: $ 273, 000
I= $ 273, 000 x 0.05
I=$13, 650
$286, 650
Year 3:
A table can be used to find our answer

12. Simple interest for the first year at 5%=
Principal x Interest Rate ( as a decimal)
= $260, 000 x 0.05
= 13,000
New principal= original principal + interest
= $260,000+ 13,000
=$273, 000
Now we can find the interest for the second
year
Finding the Interest for the First year

13. Finding the Interest for the second year
REMEMBER THAT THE
NEW PRINCIPAL IS NOW
$273,000
Simple interest for the second year= $273, 000 x 0.05
= $13,650
New principal= original principal + interest
= $273,000+ 13,650
=$286, 650
That is our final answer $286, 650