Section 6.

1 Compound Interest

Simple Interest Formulas:

Interest: I = P rt
-
-

Accumulated amount: A = P (1 + rt)

Here P is the principal (money you start out with), r is the interest rate (as a decimal), and t is the
time (in years).
-
== - -

1. Find the accumulated amount at the end of 9 months on a $1800 bank deposit paying simple -
- -

interest at a rate of 9%/year. (Round answer to the nearest cent.)

- -

A Pll t rt )
.o9(÷z ) )
=

A -
-
1800kt
A- =
?

p
-

-
1800
a$l9
= 09
r .

t =

÷ yrs

2. A bank deposit paying simple interest at the rate of 6%/year grew to a sum of $1300 in 8 months.
- - - -

Find the principal. (Round answer to the nearest cent.)

-

Pcltrt )
A -

PC It .
06 ( Ee ) )
1300 =

1300
A =

p . ? ÷%='::¥I
06

p=$l2
r = a

t =
If Irs
3. Determine the simple interest rate at which $2400 will grow to $2495 in 5 months. (Round answer .
-
-

to two decimal places.)

-

ltrt )
A =P
)
C
)
zyqg =z4ooUtrC5lR
A
2495 - -
2400
-

2400
.

P 2400
tear
-

r=
? 2%753=1
- a' 095
⇒ r

Ez yrs LEI
⇒r=9o5%J
it -

I =

2429%3
-

⇒
-

- c 5h27
( 5112 )
4. Determine the time needed for $2600 to grow to $3000 with simple interest paid at a rate at
- - - -
-

5.6%/year. (Round answer to the nearest year.)

-

z•••=z6oo( )
't

t=3
-

ltrt ) 1+0056
A=P(
-2600
JEE
A 23000
It
056T
3000
.

2600
p =
↳

z÷=::¥E
. 056
re
⇒

t
.
?
056
I .

5. Find the interest earned on a $2200 bank deposit paying simple interest at a rate of 8.5%/year
- -
- -

after 11 months. (Round answer to the nearest cent.)

-
-

I - Prt
)z )
-

p -
-
2200 1=6200.74085
r
= .
085 $171.4271
t
llyzyrs
-
-

2 Fall 2019, Maya Johnson

 Compounded Interest Formulas: Accumulated Amount

A = P (1 + i)n

where i =
-
r
m
, n = mt, and
-
-
A = Accumulated amount at the end of n conversion periods.
P = Principal.
r = Nominal interest rate per year.
m = Number of conversion periods per year.
t = Term (number of years)

Calculator Functions

TVM Solver: We can use the TVM Solver on our calculator to solve problems involving com-
-

pound interest. To access the Finance Menu, you need to press APPS , 1 , and then 1 again.
- -
-

(Please note that if you have a plain TI-83, you need to press 2ND , x 1 to access the Finance
-
- -

Menu). Below we define the inputs on the TVM Solver:

-

often
,%f%
comp
N = mt =the total number of compounding periods l how ya
-

I% = interest rate (as a percentage)

- -

P V = present value (principal amount). Entered as a negative number if invested, a positive - -

- - -

number if borrowed. -

P M T = payment amount
-

F V =future value (accummulated amount) -

P/Y = C/Y = m =the number of compounding periods per year.

-
w
-

Move the cursor to the value you are solving for and hit ALPHA and then ENTER. -
-

6. Find the present value of $40, 000 due in 4 years at the given rate of interest. (Round answer to
- -

the nearest cent.)

10%/year compounded daily.

$ay

IE
-

N=

!:{
I% =
PV =
P MT = joshua
FV =
P/Y = C/Y = 365
-

3 Fall 2019, Maya Johnson

7. A young man is the beneficiary of a trust fund established for him 16 years ago at his birth. If the
-

original amount placed in trust was $20, 000, how much will he receive if the money has earned
-
2-

interest at the rate of 9%/year compounded quarterly? (Round answer to the nearest cent.)
-

N=

FV=$83.on€
I% = 9

:&
:}
PV =
P MT =
,
FV = .

P/Y = C/Y = 4

8. Five and a half years ago, Chris invested $10, 000 in a retirement fund that grew at the rate of
-
-

10.82%/year compounded quarterly. What is his account worth today? (Round answer to the
-
- -

nearest cent.)

N = 415.5 )

Fastness
I% = 10.82

PV =
P MT =
FV =
i :÷% ,

P/Y = C/Y = 4

9. Kim invested a sum of money 7 years ago in a savings account that has since paid interest at the
-

rate of 8.5%/year compounded monthly. Her investment is now worth $36, 184.65. How much
- - -

did she originally invest? (Round answer to the nearest cent.)

-

N= 1217 )

I% =
PV = ?
8.5

- 20000.00
PV=$z#y
P MT = O

F V = 36184.65
P/Y = C/Y = 12

4 Fall 2019, Maya Johnson

10. Your rich uncle has just given you a high school graduation present of $1, 400, 000. The present,

=
however, is in the form of an 18-year bond with an annual interest rate of 4.7% compounded
-

annually. The bond says that it will be worth $1, 400, 000 in 18 years. What is this gift worth at
-

the present time? (Round answer to the nearest cent.)

¥
N= )

pv-8612.474.is#
I% =
PV =
P MT = £2474.15
FV =
P/Y = C/Y = 1-

E↵ective Rate of Interest Formula:

⇣ r ⌘m
ref f = 1+ 1
- m-

Calculator Steps:

Press APPS , 1 , scroll down to E↵ and hit ENTER .

- - -
-

The format is
E↵(annual interest rate as a percentage, the number of compounding periods per year)
T
p

5 Fall 2019, Maya Johnson

11. Find the e↵ective rate of interest corresponding to a nominal rate of 11.5%/year compounded in
- -

the following ways. (Round answers to two decimal places.)

(a) compounded annually

lla
E -
-

(b) compounded semiannually

11.8390J
Eff ( 11.5 ,
2) =

(c) Which interest rate would you prefer if you were earning the interest through a savings

IItaernestm.inepamotneebgsineeyouwautto-y.PT
I
account? Which one would you choose if you were paying the interest through a bank loan?
-

Ipnateesfnmpqtca)sincyoawanttT#
it
Earning :

' it :
ng

6 Fall 2019, Maya Johnson