simple interest compound interest worksheet

asalmes

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05-12-2024

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Understanding the difference between simple and compound interest is crucial for making sound financial decisions. This article provides a clear explanation, along with a worksheet to help you practice calculating both. Whether you're saving for the future or taking out a loan, grasping these concepts is essential. This worksheet will help you master calculating simple and compound interest.

What is Simple Interest?

Simple interest is calculated only on the principal amount (the initial amount of money). It doesn't take into account any accumulated interest from previous periods. The formula is straightforward:

Simple Interest = Principal x Rate x Time

Where:

• Principal: The initial amount of money.
• Rate: The annual interest rate (expressed as a decimal).
• Time: The time period in years.

Example: If you invest $1,000 at a 5% simple interest rate for 3 years, the simple interest earned would be:

$1000 x 0.05 x 3 = $150

Your total amount after 3 years would be $1,150 ($1000 + $150).

What is Compound Interest?

Compound interest is calculated on both the principal amount and any accumulated interest from previous periods. This "interest on interest" effect makes compound interest significantly more powerful over time. The formula is slightly more complex:

A = P (1 + r/n)^(nt)

Where:

• A: The future value of the investment/loan, including interest.
• P: The principal amount.
• r: The annual interest rate (decimal).
• n: The number of times that interest is compounded per year (e.g., 1 for annually, 4 for quarterly, 12 for monthly).
• t: The number of years.

Example: If you invest $1,000 at a 5% interest rate compounded annually for 3 years, the calculation would be:

A = $1000 (1 + 0.05/1)^(1*3) = $1157.63

Your total amount after 3 years would be $1,157.63 – significantly more than with simple interest.

Simple Interest vs. Compound Interest: A Comparison

Simple and Compound Interest Worksheet

Here's a worksheet to help you practice calculating both simple and compound interest. Remember to convert interest rates to decimals before calculating.

(Remember to show your work!)

Section 1: Simple Interest

1. Principal: $500, Rate: 4%, Time: 2 years. Calculate the simple interest and the total amount.

2. Principal: $2000, Rate: 6.5%, Time: 5 years. Calculate the simple interest and the total amount.

3. Principal: $10,000, Rate: 3%, Time: 10 years. Calculate the simple interest and the total amount.

Section 2: Compound Interest

1. Principal: $500, Rate: 4%, Compounded Annually, Time: 2 years. Calculate the total amount.

2. Principal: $2000, Rate: 6.5%, Compounded Semi-Annually (twice a year), Time: 5 years. Calculate the total amount.

3. Principal: $10,000, Rate: 3%, Compounded Monthly, Time: 10 years. Calculate the total amount.

Answers (For Checking Your Work)

(Note: Due to rounding, your answers might slightly differ. Make sure your method is correct.)

Section 1: Simple Interest

1. Simple Interest: $40, Total Amount: $540
2. Simple Interest: $650, Total Amount: $2650
3. Simple Interest: $3000, Total Amount: $13000

Section 2: Compound Interest

1. Total Amount: Approximately $540.80
2. Total Amount: Approximately $2776.84
3. Total Amount: Approximately $13488.50

This worksheet and explanation should help you better understand the difference between simple and compound interest. Remember, compound interest is a powerful tool for building wealth over time! For more advanced financial calculations, consider using online calculators or financial software.