Applied Compound Interest: loans

Example 1: Find the amount of interest when $10,000 is invested for 2 years at 3.75% p.a. compounded
quarterly
Given: P = 10 000, r = 3.75%, m = 4, t = 2 years. Question: find amount of interest
S = 10 000(1+ 0.0375/4)4×2 = $10 775.08
The amount of interest is the difference between the amount invested (P) and the future value (S)
Interest amount = S – P = 775.08

Example 2: If you borrowed $3500 at 5% compounded daily on December 1st, 2006 and plan to return
it on November 1st, 2007, how much money do you need to pay back?
Given: P = 3500, r = 5%, m = 365, t = 335 days. Question: find S
S = 3500(1+0.05/365)335= 3500(1.000136986)335 = 3500(1.046956378) = $3664.35
You would need to pay back $3664.35.

Example 3: You have borrowed $4250 at 3.75% compounded monthly and have kept that money for
52.09 months. How much would you have to pay the bank back today?
Given: P = 4250, r = 3.75%, m = 12, t = 52.09 months Question: find S
S = 4250(1+0.0375/12)52.09 = $5000.04
You would have to pay the bank $5000.04

Exercises to practice

1. $17,200 is invested at 5% compounded monthly. What is the future value of the investment after 2
years? (19004.99)

2. Find the amount to which $6,000 will grow if invested at 10% p.a. compounded quarterly for five
years. (9831.70)

3. You buy a house for $345,000, and take a loan of $300,000. If the interest rate is 4.15% compounded
monthly, how much interest will you owe in the first month?
(1037.5)

4. Let's say you want to reach $2,000 in 5 years at 10% of simple interest. How much should you start
with?
(P=1333.33)

5. What is the Future Value of $55,000 invested for 7 years at 7% compounded quarterly?
(89397.71)