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Simple and Compound Interest-Problem-Set-1

This document defines and provides formulas for simple and compound interest. Simple interest is calculated on the original principal only, while compound interest is calculated on both the principal and previously earned interest. Several examples are provided to demonstrate calculating simple and compound interest amounts over time for different principal amounts, interest rates, and time periods. Finally, 11 practice problems are provided for the reader to calculate simple and compound interest amounts in various scenarios.

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John Vergel Pensilga
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© © All Rights Reserved
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216 views

Simple and Compound Interest-Problem-Set-1

This document defines and provides formulas for simple and compound interest. Simple interest is calculated on the original principal only, while compound interest is calculated on both the principal and previously earned interest. Several examples are provided to demonstrate calculating simple and compound interest amounts over time for different principal amounts, interest rates, and time periods. Finally, 11 practice problems are provided for the reader to calculate simple and compound interest amounts in various scenarios.

Uploaded by

John Vergel Pensilga
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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SIMPLE AND COMPOUND INTEREST

SIMPLE INTEREST is interest paid only on the original amount of the principal at each
specified interval (s uch as annually). The formula is I = Prt, where I =
Interest, P = Principal (money at the start), r = interest rate, and t = time.

COMPOUND INTEREST is interest paid on both the original principal and the interest
earned previously. The formula for compound interest is A = P(1 + r)t , where A = total
amount including previous interest earned, P = principal, r = interest rate, and t = time.

Example 1
Wayne earns 4.7% simple interest for 5 years on $4500. How much interest does he earn?

Put the numbers in the formula I = Prt. I = 4500(4.7%)5

Change the percent to a decimal. = 4500(0.047)5

Multiply. = 1057.50 Wayne would earn $1057.50 interest.

Example 2
Use the numbers in Example 1 to find how much money Wayne would have if he earned 4.7%
interest compounded annually.
Put the numbers in the formula A = P(1 + r)t. A = 4500(1 + 4.7%)5

Change the percent to a decimal. = 4500(1 + 0.047)5

Multiply. = 5661.69 Wayne would have $5661.69.

Subtract the results of the two examples to compare the difference in earnings when Wayne is
earning compound interest instead of simple interest. Wayne would earn $1161.69 in compound
interest: $5661.69 – $4500 = $1161.69. $1161.69 – $1057.50 = $104.19, so Wayne would have
$104.19 more with compound interest than he would have with simple interest.
Problems

Solve the following problems.

1. Tong loaned Jody $70 for a month. He charged 5% simple interest for the month. How
much did Jody have to pay Tong?
2. Jessica’s grandparents gave her $5000 for college to put in a savings account until she
starts college in four years. Her grandparents agreed to pay her an additional 6.5% simple
interest on the $5000 for every year. How much extra money will her grandparents give
her at the end of four years?
3. David read an ad offering 7 % simple interest on accounts over $1500 left for a minimum
of 5 years. He has $1500 and thinks this sounds like a great deal. How much money will
he earn in the 5 years?

4. Javier’s parents set an amount of money aside when he was born. They earned 5.25%
simple interest on that money each year. When Javier was 15, the account had a total of
$1181.25 interest paid on it. How much did Javier’s parents set aside when he was born?

5. Kristina received $125 for her birthday. Her parents offered to pay her 4.25% simple
interest per year if she would save it for at least one year. How much interest could
Kristina earn in a year?

6. Kristina decided she would do better if she put her money in the bank for one year, which
paid 3.75% interest compounded annually. Was she right?

7. Suppose Jessica (from problem 2) had put her $5000 in the bank at 2.85% interest
compounded annually. How much money would she have earned there at the end of the 4
years?

8. Mai put $3750 in the bank at 3.87% interest compounded annually. How much was in her
account after 7 years?

9. What is the difference in the amount of money in the bank after five years if $3500 is
invested at 3.4% interest compounded annually or at 2.8% interest compounded annually?

10. Elizabeth was listening to her parents talking about what a good deal compounded interest
was for a retirement account. She wondered how much money she would have if she
invested $2000 at age 20 at 2.8% interest compounded quarterly (four times each year) and
left it until she reached age 65. Determine what the value of the $2000 would become.

11. Elizabeth decided to try another problem. If she invested $2500 at age 25 at 2.65% interest
compounded quarterly, how much would it be worth when she reached age 65?

12. Compare your answers for problems 10 and 11. What are your conclusions?

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