Percent Applications: Simple and Compound Interest

Understanding Interest

Interest is the money paid for borrowing money, or the money earned for lending money. It's an essential concept in personal finance, loans, and investments.

**Simple Interest** is calculated only on the principal amount. The formula is: $$I = Prt$$ where:

**I** = Interest earned
**P** = Principal amount (initial investment or loan)
**r** = Annual interest rate (as a decimal)
**t** = Time (in years)

**Compound Interest** is calculated on the principal amount and also on the accumulated interest from previous periods. It's "interest on interest." $$A = P(1 + r/n)^{nt}$$ where:

**A** = Amount after time t (principal + interest)
**P** = Principal amount
**r** = Annual interest rate (as a decimal)
**n** = Number of times interest is compounded per year
**t** = Time (in years)

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Video: Simple vs. Compound Interest 📈

Watch this video to visualize the difference in growth between simple and compound interest.

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Practice Problems

Calculate the interest or total amount for each scenario. Round to two decimal places.

1) Simple Interest: Find I.

P = $1,000, r = 5%, t = 3 years

2) Simple Interest: Find A.

P = $500, r = 4%, t = 2 years

3) Compound Interest: Find A.

P = $2,000, r = 6%, t = 5 years (compounded annually)

4) Compound Interest: Find A.

P = $1,500, r = 8%, t = 2 years (compounded semi-annually)

⚡ Interest Speed Quiz

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