Question

What is the equation for an amount (future value) of an investment that earns simple interest? What is the equation for an amount (future value) of an investment that earns compound interest? Label each variable using arrows. 

Answer 1

Answer

Simple interest

$\qquad\qquad \begin{aligned} Final \,amount &= P+Ptr\\ &= P(1+tr) \end{aligned}$

• P= Initial deposit amount
• t = time (expressed in years)
• r = annual interest rate (%)

Compound interest

$\qquad\qquad \begin{aligned} Final \, amount&= P(1+\frac{r}{n})^{tn}\\ \end{aligned}$

• P = Initial deposit amount/ initial balance
• t = number of time periods elapsed
• r = interest rate
• n = number of times the interest applied per time period