SolvingCompoundInterestProblems

WhatisCompoundInterest?
Ifyouwalkintoabankandopenupasavingsaccountyouwillearninterestonthemoneyyoudepositin
thebank.Iftheinterestiscalculatedonceayearthentheinterestiscalledsimpleinterest.Iftheinterestis
calculatedmorethanonceperyear,thenitiscalledcompoundinterest.
CompoundInterestFormula
Themathematicalformulaforcalculatingcompoundinterestdependsonseveralfactors.Thesefactors
includetheamountofmoneydepositedcalledtheprincipal,theannualinterestrate(indecimalform),the
numberoftimesthemoneyiscompoundedperyear,andthenumberofyearsthemoneyisleftinthebank.
Thesefactorsleadtotheformula
FV=futurevalueofthedeposit
P=principaloramountofmoneydeposited
r=annualinterestrate(indecimalform)
n=numberoftimescompoundedperyear
t=timeinyears.

n t

FV = P 1+
n

SolvingCompoundInterestProblems
Tosolvecompoundinterestproblems,weneedtotakethegiveninformationatplugtheinformationintothe
compoundinterestformulaandsolveforthemissingvariable.Themethodusedtosolvetheproblemwill
dependonwhatwearetryingtofind.Ifwearesolvingforthetime,t,thenwewillneedtouselogarithms
becausethecompoundinterestformulaisanexponentialequationandsolvingexponentialequationswith
differentbasesrequirestheuseoflogarithms.
ExamplesNowletssolveafewcompoundinterestproblems.
Example1:Ifyoudeposit$4000intoanaccountpaying6%annualinterestcompoundedquarterly,how
muchmoneywillbeintheaccountafter5years?
4(5)

0.06
FV = 4000 1+

Pluginthegivinginformation,P=4000,r=0.06,n=4,
andt=5.

FV = 4000(1.015)20
FV = 4000(1.346855007)

Usetheorderoroperationstosimplifytheproblem.Ifthe
problemhasdecimals,keepasmanydecimalsaspossible
untilthefinalstep.

FV=5387.42

Roundyourfinalanswertotwodecimalsplaces.

After5yearstherewillbe$5387.42intheaccount.

Example2:Ifyoudeposit$6500intoanaccountpaying8%annualinterestcompoundedmonthly,how
muchmoneywillbeintheaccountafter7years?
12(7)

0.08
FV = 6500 1+

12

Pluginthegivinginformation,P=6500,r=0.08,n=12,
andt=7.

FV = 6500(1.00666666)84
FV =6500(1.747422051)

Usetheorderoroperationstosimplifytheproblem.Ifthe
problemhasdecimals,keepasmanydecimalsaspossible
untilthefinalstep.

FV=11358.24

Roundyourfinalanswertotwodecimalsplaces.

After7yearstherewillbe$11358.24intheaccount.
Example3:Howmuchmoneywouldyouneedtodeposittoday at9%annualinterestcompoundedmonthly
tohave$12000intheaccountafter6years?
12(6)

0.09
12000 = P 1+

12

Pluginthegivinginformation,FV=12000,r=0.09,n=
12,andt=6.

12000 = P(1.0075)72

Usetheorderoroperationstosimplifytheproblem.Ifthe
problemhasdecimals,keepasmanydecimalsaspossible
untilthefinalstep.

12000 = P(1.712552707)
P=7007.08

Divideandroundyourfinalanswertotwodecimals
places.

Youwouldneedtodeposit$7007.08tohave$12000in6years.

Inthelast3exampleswesolvedforeitherFVorPandwhensolvingforFVorPismostlyacalculator
exercise.Becarefulnottotryandtypetoomuchintothecalculatorinonestepandletthecalculator
storeasmanydecimalsaspossible.Donotroundofftoosoonbecauseyouranswermaybeslightlyoff
andwhendealingwithmoneypeoplewanteverycenttheydeserve.
Inthenext3exampleswewillbesolvingfortime,t.Whensolvingfortime,wewillneedtosolve
exponentialequationswithdifferentbases.Rememberthattosolveexponentialequationswith
differentbaseswewillneedtotakethecommonlogarithmornaturallogarithmofeachside.Taking
thelogarithmofeachsidewillallowustouseProperty5andrewritetheproblemasamultiplication
problem.Oncetheproblemisrewrittenasamultiplicationproblemweshouldbeabletosolvethe
problem.

Example4:Ifyoudeposit$5000intoanaccountpaying6%annualinterestcompoundedmonthly,how
longuntilthereis$8000intheaccount?
12t

0.06
8000 = 5000 1+

12

Pluginthegivinginformation,FV=8000,P=5000,r=
0.06,andn =12.

8000 =5000(1.005)12t

Usetheorderoroperationstosimplifytheproblem.Keep
asmanydecimalsaspossibleuntilthefinalstep.

1.6 =1.00512t

Divideeachsideby5000.

log(1.6) = log(1.00512t)

Takethelogarithmofeachside.ThenuseProperty5to
rewritetheproblemasmultiplication.

log1.6 =(12t)(log1.005)
log1.6
=12t
log1.005

Divideeachsidebylog1.005.

94.2355323212t

Useacalculatortofindlog1.6dividedbylog1.005.

t7.9

Finishsolvingtheproblembydividingeachsideby 12
androundyourfinalanswer.

Itwilltakeapproximately7.9yearsfortheaccounttogofrom$5000to$8000.
Example5:Ifyoudeposit$8000intoanaccountpaying7%annualinterestcompoundedquarterly,how
longuntilthereis$12400intheaccount?
4t

0.07
12400 = 8000 1+

Pluginthegivinginformation,FV=12400,P=8000,r=
0.07,andn =4.

12400 =8000(1.0175) 4t

Usetheorderoroperationstosimplifytheproblem.Keep
asmanydecimalsaspossibleuntilthefinalstep.

1.55 =1.0175 4t

Divideeachsideby 8000.

log(1.55) = log(1.01754t)

Takethelogarithmofeachside.ThenuseProperty5to
rewritetheproblemasmultiplication.

log1.55 =(4t)(log1.0175)
log1.55
= 4t
log1.0175

Divideeachsidebylog1.0175.

25.261632794t

Useacalculatortofindlog1.55dividedbylog1.0175.

t6.3

Finishsolvingtheproblembydividingeachsideby 4and
roundyourfinalanswer.

Itwilltakeapproximately6.3yearsfortheaccounttogofrom$8000to$12400.

Example6:At3%annualinterestcompoundedmonthly,howlongwillittaketodoubleyourmoney?
Atfirstglanceitmightseemthatthisproblemcannotbesolvedbecausewedonothaveenough
information.Itcanbesolvedaslongasyoudoublewhateveramountyoustartwith.Ifwestartwith
$100,thenP=$100andFV=$200.
12t

0.03
200 = 100 1+

12

Pluginthegivinginformation,FV=200,P=100, r=
0.03,andn =12.

200 =100(1.0025)12t

Usetheorderoroperationstosimplifytheproblem.Keep
asmanydecimalsaspossibleuntilthefinalstep.

2 =1.0025 12t

Divideeachsideby 100.

log(2) = log(1.0025 12t)

Takethelogarithmofeachside.ThenuseProperty5to
rewritetheproblemasmultiplication.

log 2 =(12t)(log1.0025)
log 2
= 12t
log1.0025

Divideeachsidebylog1.0025.

277.605301612t

Useacalculatortofindlog2dividedbylog1.0025.

t23.1

Finishsolvingtheproblembydividingeachsideby 12
androundyourfinalanswer.

At3%annualinterestitwilltakeapproximately23.1yearstodoubleyourmoney.

AdditionExamples
Ifyouwouldliketoseemoreexamplesofsolvingcompoundinterestproblems,justclickonthelinkbelow.
AdditionalExamples

PracticeProblems
Nowitisyourturntotryafewpracticeproblemsonyourown.Workoneachoftheproblemsbelowand
thenclickonthelinkattheendtocheckyouranswers.
Problem1:Ifyoudeposit$4500at5%annualinterestcompoundedquarterly,howmuchmoneywillbein
theaccountafter10years?
Problem2:Ifyoudeposit$4000intoanaccountpaying9%annualinterestcompoundedmonthly,how
longuntilthereis$10000intheaccount?
Problem 3:Ifyoudeposit$2500intoanaccountpaying11%annualinterestcompoundedquarterly,how
longuntilthereis$4500intheaccount?
Problem 4:Howmuchmoneywouldyouneedtodeposittodayat5%annualinterestcompoundedmonthly
tohave$20000intheaccountafter9years?
Problem5:Ifyoudeposit$6000intoanaccountpaying6.5%annualinterestcompoundedquarterly,how
longuntilthereis$12600intheaccount?
Problem6:Ifyoudeposit$5000intoanaccountpaying8.25%annualinterestcompoundedsemiannually,
howlonguntilthereis$9350intheaccount?
SolutionstoPracticeProblems