Teaching Notes 8.17: Using the Compound Interest Formula
Because of the complexity of the compound interest formula, students often have difficulty
understanding how to solve compound interest problems. Incorrect substitution of values for
variables and computational mistakes are particularly common.- Explain to your students that the compound interest formula is used by a bank or invest-
ment company to determine payment of interest on the principal and any unpaid interest
accumulated in an account. - Review the formula and information on the worksheet with your students. Define all the
variables, making sure that your students understand the terms of the formula. Make special
note of the variablesnandt. Both variables must be expressed in terms of the number of
years. For example, if interest was compounded semiannually,nwould equal 2. If money was
deposited for 6 months,twould equal 0.5. - Offer the following example: An amount of $1,000 is deposited in a bank at an annual inter-
est rate of 2.4 percent, compounded quarterly. No money is withdrawn from the account.
What is the principal after five years? Note thatr= 0. 024 ;n=4 because interest is com-
pounded four times a year andt=5 because the money is invested for five years. Show
students how to determine the value of each variable, substitute the values in the equation,
and solve forA.(P=1000,r= 0 .024,n=4,t= 5 ;A=$1,127.09)
EXTRA HELP:
Be sure to substitute the correct values in the formula.ANSWER KEY:
(1)$797.91 (2)$1,136.35 (3)$2,615.20 (4)$3,904.82
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(Challenge)Bank A, because she would earn $20 in interest by the end of the year. In Bank B,
she would earn about $17.62 by the end of the year.
------------------------------------------------------------------------------------------306 THE ALGEBRA TEACHER’S GUIDE