Introduction to Simple,

Compound, and Continuously

Compounding Interest
Lesson 1.6
Benchmarks: MA.912.FL.3.1, MA.912.FL.3.2, MA.912.FL.3.4
Interest
• When you are investing money, you earn an interest rate from the
bank or investment firm.
• When you borrow money, for example using a credit card, student
loan, car loan, or home loan, you are charged an interest rate from
the bank or the investment firm.
• There are three different types of interest rate: simple, compound,
and continuously compound interest.
• In the next two lessons, we are going to investigate how these
interest rates can affect your finances.
Simple Interest
• Simple interest is based on the initial amount invested, or principal.
• Each period, the total amount of interest earned increases by the
same amount.
• The balance of an account after each period of time is the sum of the
principal and the interest earned.
• What kind of function do you think would represent simple interest?
• Since the balance grows at a constant amount, it can be modeled by a
linear function.
Simple Interest Equation
• The equation for simple interest is , where:
• is the current amount.
• is the principal, or the initial amount.
• This can be the initial amount invested or the initial amount
borrowed.
• is the annual interest rate expressed as a decimal, .
• is time in years or months (situation specific).
Example 1: Using Simple Interest
Tanya opened a savings account with $2100. The bank offers an
annual simple interest rate of 6%. Find the amount in Tanya’s account
after each number of years.
a. 3 years
b. 8 years
Example 1: Solutions
a. 3 years
Write an equation to represent the amount of money in Tanya’s
account after t years. Then evaluate the equation when t = 3.
A = P(1 + rt) Equation for simple interest
A = 2100(1 + 0.06t) P = 2100 and r = 6% or 0.06.
A = 126t + 2100 Distributive Property
= 126(3) + 2100 t=3
= 2478 Simplify.

After 3 years, Tanya will have $2478 in her account.

Example 1: Solutions

b. 8 years
Evaluate the equation from part a when t = 8.
A = 126(8) + 2100
A = 3100
t=8
Simplify.

After 8 years, Tanya will have $3108 in her account.

Try it on your own
Rashesh opened a savings account with $1300. The account earns 11%
simple interest annually. What will be the balance of Rashesh’s account
after 15 years?
A =P(1 + rt) Equation for simple interest
A = P = 1300 and r = 11% or 0.11.
A = Distributive Property
= t = 15
= Simplify.
Example 2: Number of Years and
Simple Interest
Jackson opened a savings account with $5000. The account earns 9.5%
simple interest annually. After how many years will the balance of the
account be $15,000? Round to the nearest tenth, if necessary.
Example 2: Solution
Write an equation to represent the amount of money in Jackson’s

A = P(1 + rt)
account after t years.
Equation for simple interest
A = 5000(1 + 0.095t) P = 5000 and r = 9.5% or 0.095
A = 475t + 5000 Distributive Property
15,000 = 475t + 5000 P = 5000 and r = 9.5% or 0.095
10,000 = 475t Subtraction Property
21.1 ≈ t Divide each side by 475.
After about 21.1 years, the balance of Jackson’s account will be
$15,000.
Try it on your own
Yin opened a savings account with $3500. The account earns 8.75% simple
interest annually. After how many years will the balance of the account be

A = P(1 + rt)
$6000? Round to the nearest tenth, if necessary.
Equation for simple interest
A = 3500(1 + 0.0875t) P = 3500 and r = 8.75% or 0.0875
A = 306.25t + 3500 Distributive Property
6000 = 306.25t + 3500 P = 3500 and r = 8.75% or 0.0875
2500 = 306.25t Subtraction Property
8.16 ≈ t Divide each side by 306.25.
After about 8.16 years, the balance of Yin’s account will be
$6,000.
Example 3: Finding the Interest Rate
Morgan has an investment worth $130,000 dollars after 20 years. If
her original investment was for $50,000 what must the interest rate
have been?
Example 3: Solutions
A =P(1 + rt) Equation for simple interest
= P = 50000, A = 130000 and t = 20
= Distributive Property
= Subtraction Property
≈r Divide each side by 1000000.

The annual interest rate for Morgan’s account is 8%.

Compound Interest
• Compound interest is interest that is calculated based on the initial
amount invested and on the accumulated interest from previous
periods.
• For example, you get charged an interest rate on a credit card. The
interest is calculated on the balance of the card and added to the bill
every month.
• What kind of function do you think would represent simple interest?
• Because the amount added every month is not constant, the function
cannot be linear.
• The function will change by a constant percent rate of change, so
compound interest can be modeled by an exponential function.
Compound Interest Equation
• The equation for simple interest is where:
• A is the current amount.
• r is the annual interest rate expressed as a decimal, .
• n is the number of times the interest is compounded each year.
• t is time in years.
• P is the principal, or the initial amount.
Example 4: Using Compound
Interest
Mitchel deposits $400 into an account that pays 3.79% annual interest
compounded weekly.
a) Write the function that represents the balance of Mitchel’s account.
b) What will the balance of Mitchel’s account be after 10 years? 20
years?
c) After how many years will the balance of the account be $500?
Example 4: Solutions
a) Write the function that represents the balance of Mitchel’s account.
• The equation for compound interest is
• It is easy to know this is compound interested because the problem states,
interest is compounded weekly.
• To write the equation, we need to determine what the value of will be.
• There are 52 weeks in the year, so .
• and .
• The equation is
• The equation can be simplified to
• We could rewrite this in function notation as
Example 4: Solutions
b) What will the balance of Mitchel’s account be after 10 years? 20 years?
Now, we can use our function to determine the values of the account at 10
and 20 years.

The account will have $584.60 after 10 years and $854.39 after 20 years.
Example 4: Solutions
c) After how many years will the balance
of the account be $500?
• In other words, we are trying to solve the
equation

• There is a way to do this algebraically;

however, in this course, we will not dive
into that.
• The best way to estimate the solution is to
graph the function using graphing
technology.
• We can say that the account will be at
$500 after 5.881 years (near the end of
the 5th year).
Try it on your own
Maria invests $5500 into a college savings account that pays 3.25%
compounded quarterly.
a) Write a function that models the savings account.
b) How much money will there be in the account after 5 years?
c) How long will it take the money to double?
Try it on your own: Solutions
a) Write a function that models the savings account.
• The equation for compound interest is
• It is easy to know this is compound interested because the problem states,
interest is compounded quarterly.
• To write the equation, we need to determine what the value of will be.
• Quarterly means 4 times throughout the year, so .
• and .
• The equation is
• The equation can be simplified to
• We could rewrite this in function notation as
Try it on your own: Solutions
b) How much money will there be in the account after 5 years?
We can use to determine the value of the account at 5 years.

The value in the account after 5 years will be $6469.43.

Try it on your own: Solutions
c. How long will it take the money to
double?

• Again, we will graph this to estimate

an answer.
• Doubling the money would mean we
are looking for the year that the
account has $11,000.
• It will take 21.414 years to double the
money in the account.
Check your understanding 1
Twin brothers Amare and Jermaine each received $1000 for graduation.
Amare invests his money in an account that pays 2.25% compounded
daily. Jermaine invests his money in an account that pays 2.25%
compounded annually.
Part A Which brother will have more money at the end of 10 years?
A. Amare B. Jermaine C. The accounts will be equal.
Part B To the nearest cent, how much more money?
$3.11
Check your understanding 2
1. Roberto invests $375 in a savings account that earns 1.4% interest
compounded monthly. How much money will he have in 3 years?
$391.08
2. Tammi wants to have $5000 in her savings account to buy a car in 4
years. If her bank offers 3.5% interest compounded quarterly, how
much should she invest now in order to buy her car?
$4349.44
Continuously Compounded Interest
• Continuously Compounded Interest is interest that is calculated based on
the initial amount invested and then interest is constantly being added to the
investment (or loan) and then interest is calculated again.
• In other words, interest is constantly being added onto the balance.
• For example, you get charged an interest rate on a credit card. The interest is
calculated on the balance of the card and added to the bill at every moment.
• What kind of function do you think would represent simple interest?
• Because the amount added every month is not constant, the function cannot
be linear.
• The function will change by a constant percent rate of change, so compound
interest can be modeled by an exponential function.
Continuously Compounded Interest
Formula
• The equation for simple interest is where:
• A is the current amount based on the time.
• r is the annual interest rate expressed as a decimal, .
• t is time in years.
• P is the principal, or the initial amount.

• This equation is based on the compounded interest formula, but

calculus is applied to produce
Example 5: Using Continuously
Compounded Interest
Leilani borrows $1800 with a 4.5% interest rate compounded
continuously. If Leilani does not make any payments, how much will
Leilani owe after:
a. 6 months?
b. 1 year?
Example 5: Solutions
a. 6 months?
Since 6 months is half the year, .

Continuously Compounded Interest

Formula
P = 1800, r = 0.045, and t = 0.5
Simplify.

After 6 months, Leilani will owe about $1840.96. So, Leilani will owe
1840.96 − 1800 = $40.96 in interest after 6 months.
Example 5: Solutions
b. 1 year?
Continuously Compounded Interest
Formula
P = 1800, r = 0.045, and t = 1
Simplify.

After 1 year, Leilani will owe about $1882.85. So, Leilani will owe
1882.85 − 1800 = $82.85 in interest after 1 year.
Try it on your own
Antonio invests $2600 in an account with a 6% interest rate
compounded continuously, making no other deposits or withdrawals.
What will Antonio’s account balance be after 4 months? (Remember
that is in terms of years)
,,

This tells us that Antonio’s investment will be at $2652.52 after 4

months.
Comparing Types of Interest
• We have discussed 3 forms of interest: Simple, Compound, and Continuously
Compounding.
Simple Compound Continuously
Interest Interest Compounded Interest

• Which type of interest grows the slowest over time?

• Simple Interest
• Which grows the fastest over time?
• Continuously Compounding
• Which type of interest is best represents by a linear function?
• Simple
• Which type of function best represents the Compound and Continuously Compounding
interests?
• Exponential
Example 6: Comparing Types of
Interest
Tom wants to invest $1800 at a bank that offers three different accounts.
Account A earns 8% interest compounded continuously, Account B earns 8%
interest compounded annually, and Account C earns 8% annual interest
always on the initial investment. If no other deposits or withdrawals are
made,
a) Determine which type of interest each account offers.
b) Write a function for each account.
c) Determine the balance on each account after 1 year and 7 years.
d) Make a recommendation to which one Tom should invest in if he plans to
leave his money in the account for 1 year or for 7 years.
Example 6: Solutions
a) Determine which type of interest each account offers.
Account A is a Continuously Compounding Interest
Account B is a Compounding Interest
Account C is a Simple Interest
b) Write a function for each account.
Account A:
Account B:
Account C:
Example 6: Solutions
c) Determine the balance on each account after 1 year and 7 years.
Amount after 1 Year Amount after 7 Years
Account A $1949.92 $3151.21
Account B $1944.00 $3084.88
Account C $2088.00 $2808.00
d) Make a recommendation to which one Tom should invest in if he
plans to leave his money in the account for 1 year or for 7 years.
If Tom only plans to leave the money in the account for 1 year, he
should choose Account C. If Tom plans to leave his money in the
account for 7 years or longer, he should choose Account A.
• There will be an assignment posted in Schoology
• Also look to the formatives and task folders in the benchmarks for
additional resources.