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SIMPLE & COMPOUND INTEREST Recall: SIMPLE INTEREST Simple interest is calculated on the initial value invested or borrowed (the principal). Simple interest is calculated using the formulae: I = Prt and A = P + I COMPOUND INTEREST compound interest: interest calculated at regular periods and added to the principal for the next period (Earn interest on the interest!!) Example Wilma bought a $500 GIC for a 3 year term. Compare the growth of her investment at 3.25% per year simple interest to the same investment at 3.25% per year compounded annually. Simple Interest: Compound Interest: Year Principal Interest (I = Prt) Amount (A = P+I) 1 2 3 Unit 5 Lesson 2 Page 1 of 2 COMPOUND INTEREST: A = P(1 + i)n Example Determine the value of a $700 investment after 6 years at 5.5% interest. CONCLUSION Money grows faster when it is calculated using compound interest. Compound interest represents an exponential growth. Simple interest represents a linear growth. Homework: p.428 #1, 6 (use table) #4, 7 (use formula) Unit 5 Lesson 2 Page 2 of 2