User:
Consumer math

Compound interest

In the real world, simple interest is normally used for a single period of less than a year, such as 30 or 60 days, because it is calculated on the original amount only. If your interest accumulated annually, you'd get a very different sum.

Compound interest is interest that accumulates on the original amount and all money that accumulated during each period.

The formula for compound interest is:

A=p(1+r)t

where A represents the final amount, t represents the time in years, p is teh principal (starting amount), and r is the interest rate expressed as a decimal.

Keisha has \$90 in a savings account. The interest rate is 10%, compounded annually. To the nearest cent, how much interest will she earn in 2 years?

A= p(1 + r)t
Ais the balance (final amount).
p is the principal (starting amount).
r is the interest rate expressed as a decimal.
t is the time in years.
The interest is the balance minus the principal.

Write the rate as a decimal.

10% = 0.1

Calculate the balance.

 A
=
 p
(
1  +
 r
)
 t

=
\$90
(
 1 + 0.1
)
2

=
\$90
 ( 1.1 )
2

=
\$90
 ( 1.21 )

=  \$108.90

Now use this to find the interest, which is the balance minus the principal.

\$108.90 – \$90 = \$18.90

The interest will be \$18.90.