Financial Math

Interest: Investing Money (Chapter 1), Interest: Borrowing Money

(Chapter 5) and Managing Money (Chapter 8)
Topic 1.1 Understanding Simple Interest
1. $500 x 2.5% x 3 • Invest: use savings to earn extra income.
$500 x 0.025 x 3 • Interest: the money paid for the use of invested
or borrowed money
$ 37.50
• Principal: the money invested or borrowed
• Interest Rate: the percent of the principal that is
2. $1000 x 3% x 35/365 pair or earned as interest
$1000 x 0.03 x 35/365 • Time: the length of time for an investment in
$2.88 years
• Simple interest: interest calculated only on the
principle invested or borrowed
• Amount: sum or the principal and interest
Simple Interest
• To calculate simple interest earned on an investment, use:
Interest (I) = Principal (P) x Interest rate (r) x time (t)
I = Prt
I = Prt
I=? I = ($1500)(0.025)(2)
P = $1500 I = $75.00
r = 2.5%
t = 2 years
Total Amount
• Amount (A) = Principal (P) + Interest (I)
A=P+I

A=?
P = $1500
I = $75.00

A = P + I = $1500 + $75.00 = $1575.00

Example 1:
• Robin is a motorcycle mechanic. She is saving for a new helmet
• Robin has saved $600. She invested it for six months in a GIC.
• The interest rate was 1.5% per year.

• Solution
• how much interest will Robin earn on her GIC?
• I = PRT
• I = ($600)(0.015)(6/12)
• I = $4.50
• What is the amount Robin will have in 6 months
• A=P+I
• A = $600 + $4.50
• A = $ 604.50
How long will Robin have to leave her
money in this investment if the helmet costs
$1000?
• A=P+I
• $1000 = $600 + ?
• I = $400

• I= Prt
• t = I/Pr
• t = $400/($600 x 0.015)
• t = $400/$9
• t = 44.4 years
• t = 45 years
Example 2
• She was planning a trip to the United States.
• She invest $5000 in the US foreign currency term deposit.
• The annual interest rate is 0.5%.
• The deposit matures in 120 days.
• How much money will see you have for her trip?
• Solution
• how much simple interest will sue?
• And what is the amount so you will have in 120 days?
Assignment
• Practice problems page 6 and 7 # 1 to 4
1.3 Understanding Compound Interest
1) 33 = 3 x 3 x 3 = 27
2) 2.52 = 2.5 x 2.5 = 6.25
3) (2+3)4 = 54 = 5 x 5 x 5 x 5 = 625
4) (1 x 2.1)3 =
Compound Interest Notes
• Madelyn invested $10000 4 years ago. The investment earned
compound interest at 2.1%/year, compounded annually. She will use
the interest to buy equipment for her cupcake business. How much
interest does Madelyn have for the equipment?

• Compound interest: Interest calculated on the principal and the

interest earned
 1 Complete the Chart
Yr Principal (amount Simple interest Amount at end of year
at the start of I = Prt A=P+I
each yr)
1 $10000 I = (10000)(0.021)(1) = A = $10000 + $210 =
$210 $10210
2 $10210 I = (10210)(0.021)(1) = A =$10210 + $214.41
$ 214.41 = $10424.41
3 $10424.41 I = (10424.41)(0.021) A = $10424.41 +
(1) = $ 218.91 $218.91 = $10643.32
4 $10643.32 I = ($10643.32)(0.021) A = $10643.32 +
(1)= $223.51 $223.51 = 10866.83
2 Use the simple interest calculations in the chart to
determine how much compound interest Madelyn earned.

• After 4 years, Madelyn’s investment is worth $ 10866.83

• To calculate the interest, subtract the starting principal.
• I = $10866.83 - $10000.00 = $ 866.83
• Madelyn has $ 866.83 interest for the equipment.
Compound Interest Formula
• To calculate the amount of compound interest earned on an
investment use this formula:
• A = P(1 + i)n
• A = Amount
• P = Principal
• i = interest per compounding period
• n = is the number of compounding periods
Example 1 Steps A, B and C
• Use the compound interest formula for the question about Madelyn
• A = P(1 + i)n
• A = $10000(1+0.021)4
• A = $10000(1.021) 4
• A = $10000 x 1.087
• A = $ 10866.83

• I = $10866.83 - $10000.00 = $866.83

Example 2
• Owen sold his auto body shop in Regina. He invested $80000 In a savings account
that earned 2.75%/yr, compounded annually. How much will Owen’s savings be
worth after 3 years.

• A = P(1 + i)n
• A = $80000(1+0.0275)3
• A = $80000(1.0275) 3
• A = $80000 x 1.084789547
• A = $ 86783.16

• Owen’s savings will be worth $ 86783.16 after 3 years

Assignment
• Page 14 & 15 # 1 to 7