Download Lesson 3.5

Compound Interest
Lesson 3.5
Agree or Disagree ?
• A bank account that pays 12% per year
yields the same results as a bank account
that pays 1% every month and compounds
interest.
Nominal vs. Effective Rate
• Nominal rate
 The stated yearly rate
 "12% compounded monthly"
• Effective rate
 The result of the compounding
 12% compounded monthly actually gives a
12.683% return on your investment
Compound Interest Formula
• Actually we saw this in the previous lesson
• Here
 r
B  P  1  
 n
nt
 r = the nominal rate
 r
 Then  1  
 n
rate
n
is the decimal for the effective
Periodic vs. Continuous
• Note the similarities between periodic
compounding
 r
B  P  1  
 n
and continuous compounding
B  Pe
k t
nt
Periodic vs. Continuous
• The k in the continuous model will always be
similar or close to the r value in the periodic
compounding model
• Generally r must be slightly larger because
there are "less" compounding periods per
year
• Example
 Convert B = P e .05t to periodic
 Convert 7.25% compounded monthly to
continuous form
Assignment
• Lesson 3.5
• Page 139
• 1 – 21 odd