UNIT 4: Interest

WHY?

We need a way to calculate how money values grow or shrink over time. If we know how to do this, we can predict:

  • How much we will actually have to pay for something later on, if we can’t pay right away.
  • How much our savings are going to grow over a length of time.
  • How much money you need to put away now, to get at a target amount of money.
  • How LONG you need to keep your savings in the bank to get at a target amount of money.

…and so much more.

Simple Interest has 4 main variables to consider:

I= Interest ______

P= Principal______

R= Rate______

T= Time______

The Magic Circle of Simple Interest

How it works:

  • The middle horizontal line is a fraction (which means DIVIDE!).
  • Letters next to each other are multiplied. (PRT = P x R x T)

To USE it:

BELOW, Write in the formulas to solve the following unknowns:

Solve for I: / Solve for P: / Solve for R: / Solve for T:

One last thing…

You must convert your rate from a % to a decimal by dividing by 100.

Ex. If rate = 25%, then…

TRY:

  1. You borrow $500 from your brother and he decides to charge you interest at a rate of 7.5% per year, until you have paid it back. You manage to finally pay it back in 4 years. How much interest did you end up paying your brother?
  1. How much money do you owe your brother NOW?

A = P + I

3.. John has 2 loans, as shown in the chart below.

Loan type / Original bill ($) / Time bill is left unpaid (years) / Interest rate (%)
American Express / $4,310 / 3 / 20.1
Student Loan / $5,250 / 1.75 / 8.9

a)How much interest will he pay back?

b)How much IN TOTAL does he have to pay back?

4..Jack has a high-interest savings account that contains, as of today, $6,700. The interest rate on the account is 6.5%. Years ago, he started out with only $3,500 in the account, and has left it alone to grow since then.

How long ago did he open the account?

  1. At Best Buy, you buy a stereo for $1,850.25. You buy it on a Best Buy credit card that says, “buy now, pay in 1 year”. Even though you don’t have to pay for it right away, the annual interest (29.5%) begins to accumulate immediately. How much do you owe once the payment is due?
  1. You bought a whole bunch of kitchen items from Sears, using their Sears Card (that has a 24.5% annual interest rate). When the first bill came in, you stuffed it under the bed without paying it off. You keep doing this with all of the Sears bills for the next 2.5 years.

Now 2.5 years later, you check the mail and see another bill from Sears. The interest on that bill is $475.25.

  1. How much money did the kitchen items originally cost, 2.5 years ago?
  1. What is the total bill now, 2.5 years later?