Simple and Compound Interest 8.12D
Vocabulary
Simple Interest – Interest paid only on the original principal (loan amount). It is
determined by multiplying the interest rate by the principal by the number of
periods.
Compound Interest - interest calculated on the initial principal and also on the
accumulated interest of previous periods of a deposit or loan. Can be thought
of as “interest on interest”.
Principal – the amount borrowed or the amount still owed on a loan, separate
from interest.
Directions
Solve the problem cards one by one. The answer to one problem will lead you
to the next problem.
Warm-Up
As a group, discuss these questions.
1. The formula for simple interest is I = Prt
What does each variable represent?
I = interest
P = principal
r = rate
t = time
2. What is the formula for compound interest?
A = P(1 + r )t
3. What is interest?
Interest is a percentage of the principal that is added to a loan or
investment over time.
4. Do you want the amount of interest to be high or low? Explain
I want the amount of interest to be high on an investment because that
is money I would be earning. I want the interest to be low for a loan
because that is money I would have to pay.
76.25
1072.5
Perla just purchased her first
car. She received a simple
interest loan from the bank of
$6500 at an interest rate of
5.5% for 3 years. What will be
her interest payment at the
end of her loan term?
Jose and his family have been
saving money for his college
fund for 6 years. How much
money did they invest if he
earned $1260 of simple
interest from a 3% interest
rate?
7,000
6,719.58
Jesse received $5000 dollars
from his grandfather after
graduating high school. He
decides to invest his money in
a compound interest account.
He earns about 3% interest
each year. About how much
will he have saved after 10
years?
Jesse decides to leave his
investment in the bank. After
another 10 years, how much
will Jesse now have saved?
9,030.56
6%
Rebekah needs to replace the
roof on her home. She took
out a loan from the bank for
$9,600. She plans to pay off
this loan after 4 years. At that
time she would have paid
$2,304 in interest. What
interest rate did she receive
on this loan?
Cesar decides to put a ring on
it. He finds the perfect
engagement ring for $5,200.
He has $2,000 saved and
takes out a loan for the
remainder. His loan term is 4
years at a 4.5% interest rate.
At the end of the loan term
how much did Cesar pay in
interest on this fabulous ring?
576
11,500
After college Briana receives a
sign-on bonus at IBM for
$10,000. She considers
investing her bonus in a
simple interest account. How
much will she have after 3
years with an interest rate of
5%?
After doing some research
Briana decides to go with a
compound interest account
instead of a simple interest
account. If she has the same
loan terms, how much more
money will Briana save with a
compound interest loan
rather than a simple interest
account?
Answers
1. Perla – first car
I = Prt
I = 6500 x .055 x 3 = $1072.50
2. Jose – investing money for college
1260 = P x .03 x 6
1260 = P x .18
P = $7,000
3. Jesse invests money in compounding account
A = P (1 + r )t
A = 5000 (1 + .03 )10
A = $6,719.58
4. Jesse – leaves his money invested for 10 more years
A = P (1 + r )t
A = 5000 (1 + .03)20
A = $9,030.56
5. Rebekah – needs a new roof
I = Prt
2304 = 9600 x r x 4
r = .06
or 6%
6. Cesar – engagement ring
I = Prt
I = 3200 x .045 x 4
I = $576
7. Briana – Bonus
I = Prt
I = 10000 x .05 x 3
I = 1500
$10,000 + 1500 = $11,500
8. Briana - compound interest
A = P (1 + r )t
A = 10000 (1 + .05)3
A = $11,576.25
$11,576.25 – 11,500 = $76.25