Question

Understanding Compound Interest

Be sure to show your work.

1. Using the simple interest method calculate total interest income for two years, given the following information: (2 points)

   1. Principal amount = $12,500.00

   2. Annual Interest rate = 10%

   3. After two years: Total interest income = [                 ]

2. Using the simple interest method calculate total interest income for three years, given the following information: (2 points)

1. Principal amount = $30,000.00

2. Annual Interest rate = 12%

3. After three years: Total interest income = [                 ]

3. Calculate the compound interest income using the following information (use the long-hand method and show your work – to assist you a table has been provided):   (8 points)

1. Principal = $10,000.00

2. Annual Interest Rate = 12%

3. Compounding Frequency – monthly

4. Total amount of money you will have at the end of the year    = [ ]

Compound Interest Table:

Month	Beginning Balance	Interest Earned	Ending Balance
1	$10,000.00
2
3
4
5
6
7
8
9
10
11
12

4. Calculate the compound interest income using the following information (using any method: long-hand, formula, or electronic calculator): (8 points)

5. Principal = $20,000.00

6. Annual Interest Rate = 12%

7. Compounding Frequency – monthly

8. After two years: Total amount of money you will have    = [ ]

9. After two years: Total Interest Income = [                  ]

Answer 1

1)	After two years: Total interest income = 12500*0.10*2 =				$                2,500
2)	After three years: Total interest income = 30000*0.12*3 =				$              10,800
3)	Month	Beginning Balance	Interest	Ending
			Earned	Balance
	1	$     10,000.00	$      100.00	$      10,100.00
	2	$     10,100.00	$      101.00	$      10,201.00
	3	$     10,201.00	$      102.01	$      10,303.01
	4	$     10,303.01	$      103.03	$      10,406.04
	5	$     10,406.04	$      104.06	$      10,510.10
	6	$     10,510.10	$      105.10	$      10,615.20
	7	$     10,615.20	$      106.15	$      10,721.35
	8	$     10,721.35	$      107.21	$      10,828.57
	9	$     10,828.57	$      108.29	$      10,936.85
	10	$     10,936.85	$      109.37	$       11,046.22
	11	$     11,046.22	$      110.46	$       11,156.68
	12	$     11,156.68	$      111.57	$       11,268.25
	Total money at the end of the year			$       11,268.25
4)	Using formula:
	After two years: Total amount of money you will have = 20000*1.01^24 =					$ 25,394.69
	After two Total interest income = 25394.69-20000 =					$    5,394.69