Pre Algebra (Period 2 & 4)

Simple & Compound Interest 7-8 (continued)

FORMULA:
A = P(1 + r/t)ⁿ

EXAMPLE:

I owe VISA $500 at 6% compounded QUARTERLY (4 times a year).

How much will I owe after 1 year?


A is the amount I'm looking for

P = $500
r = 6% or .06

t = 4 compounds a year or 1/4 of a year or .25

n = 4 because I want to know after a year and the interest will compound 4 times for that period


A = 500[1 + (.06)(.25)]⁴
A = 500(1.015)⁴


A =(500)(1.06136)

A = $530.68

TIMING OF COMPOUNDING:

Interest can be compounded
annually (once a year),

semiannually (twice a year),

quarterly (4 times a year),

monthly (12 times a year) or even

daily! (365 times a year!)