Money Math

Interest and Percent

There are two main formulas you will need for the problems on this page:

I = P x r x t

where I = Interest, P = principal, r = interest rate, t = time

Future Value = P x (1 +

where P = principal, r = interest rate, t = time in years, n = number of times per year interest is compounded

Compound Interest = Future Value - P

Answer:

This is simple interest as it wasn't being compounded throughout the year. So you use the simple interest formula:

I = P x r x t

P = the principal or $1272 in this case

r = interest rate which is 3%. We write that as 3/100 or .03 in the formula.

t = time, in this case that is 1 for 1 year

I = 1272 x .03 x 1

I = $38.16

I = P x r x t

I = $3000 x .025 x 10

I = $750

You will earn $750 in interest over 10 years.

Future Value = P x (1 +

P = principal which is $3000

r = interest rate which is 2.5% or .025

t = time in years which is 10

n = number of times per year the interest is calculated which is 12 for each month of the year

FV = 3000 x (1 +

FV = 3000 x 1.28369154...

FV = $3,851.07

Now subtract the original principal from the future value to get the compound interest:

Compound interest = $3,851.07 - $3,000 = $851.07

For the second part of the problem we compare the compound interest with the simple interest figured in problem #2:

Compound interest - Simple interest

$851.10 - $750 = $151.10

You can see that by using compound interest the deposit earned an additional $151.10.

In this case we can just use the future value formula for compound interest:

Future Value = P x (1 +

P = $5000

r = 5% or .05

t = 7 (for seven years)

n = 4 (this is because quarterly is every 3 months or four times per year)

FV = 5000 x (1 +

FV = $7,079.96

The investment will be worth $7,079.96 after seven years.

Note: This information is not to be used for individual legal, tax, or investment advice. You should always contact a professional financial or tax advisor before making financial decisions.

Math >> Money and Finance