Workplace Math and PLAR Prep
Simple and Compound Interest
Simple Interest
Calculating Simple Interest
Interest is the money you pay for borrowing money. The amount of interest you pay on any loan depends on three things:
How much you borrow. (principal)
The interest rate, which is a percent. (rate)
How long you keep the money before paying it back. (time)
Simple interest formula: I = Prt
I is the interest earned,
P is the principal or the amount of money that you start out with,
r is the annual interest rate as a decimal, and
t is the time in years.
For example: How much will you pay in interest on $2,000 for 3 years at 11.5%?
I = (what we want to know)
P= $2000
r= 11.5%
t=3
1. Change the percent to a decimal. 11.5% =.115
2. Multiply the principal by the rate by the time. I = $2000 x .115 x 3
I= $690
3. The Interest is $690 for three years at 11.5% interest.
Try these ones yourself:
How much will you pay in interest on a $5000 loan for 5 years at 5.5%? How much will you pay overall?
click the arrow for the answer---------------->
Change the percent to a decimal. 5.5% = 0.055
Use the formula I=Prt and multiply the principal by the rate by the time. I = $5000 x 0.055 x 5
The interest is $1375 for five years at 5.5% interest.
The total cost of the loan is $1375.00 + $5000.00 = $6375.00
You would like to buy a new laptop. The cost of the laptop is $1500 with all the program software installed. You only have $500. The store offers you a loan for one year for the remainder of the money at a 8.9% interest rate. How much will you pay in interest? How much will you pay overall?
click the arrow for the answer --------------------->
a. How much money will the loan be for? $1500 - $500 = $1000
b. Change the percent to a decimal. 8.9% = 0.089
c. Use the formula I=Prt and multiply the principal by the rate by the time. I = $1000 x 0.089 x 1
d. The interest is $89 for one year at a 8.9% interest rate.
e. The total cost of the laptop is $1500.00 + $89.00 = $1589.00.
Compound Interest
Compound interest:
Interest that is earned on both the principal and any interest that has been earned previously.
Compound interest formula: A = P(1 + r)t
A represents the amount of money in the account at the end of the time period,
P is the principal,
r is the annual interest rate, and
t is the time in years.
Calculating Compound Interest using Simple Interest
For example: Simon deposits $400 in an account that pays 3% interest compounded annually. What is the balance of Simon’s account at the end of 2 years?
Find the balance at the end of the first year.
I =Prt Use the simple interest formula.
(change 3% to a decimal = 0.03)
I =$400 x 0.03 x 1
I=12
Add the Principal to the interest 400 +12 = 412
The balance at the end of the first year is $412
find the balance at the end of the second year.
I =Prt Use the simple interest formula.
I = 412 x 0.03 x 1
I = 12.36
Add to balance from first year: $412 + $12.36 = $424.36
Calculating compound interest using Compound Interest Formula
A = P(1 + r)t
For example: Jackie deposits $325 in an account that pays 4.1% interest compounded annually. How much money will Jackie have in her account after 3 years?
A = P(1 + r)t
A = 325(1+0.041)^3
A = 325(1.041)^3
A = 325 x 1.128111921
A = 366.64
Jackie will have $366.64 in her account after 3 years.
Try these ones yourself...
Julio deposits $345 in an account that earns 3.1% interest compounded annually. How much money is in the account after 4 years? click the arrow to see the answer --------------------->
A = P(1 + r)t
A = 345(1 +0 .031)^4
A = 345 (1.031)^4
A = 345 x 1.12989
A = 389.81
Kim deposits $650 in an account that earns 4% interest compounded annually. How much money is in the account after 2 years?
click the arrow to see the answer --------------------->
A = P(1 + r)t
A = 650(1 + 0.04)^2
A = 650(1.04)^2
A = 650 x 1.0816
A = 703.04