Algebra II12.

5 Compound & Continuously Compounding Interest Notes

You won the lottery! Now what do you do?
Imagine you won $1000 in the lottery. Instead of spending your
new-found fortune on a flat-screen TV and new sneakers, you
decide to invest your cash in a savings account.
The savings account you choose has a ________________ annual
interest rate. You have several options: the bank can compound
your interest annually, semi-annually, quarterly, or
monthly. Use the timelines below to choose the option that
would make you the most money.
Annually:
______________________________________________________________________________
______________
$1000
March 2015
March 2016

Semi-Annually:
______________________________________________________________________________
_______
$1000
March 2015
March 2016

Sept 2015

Quarterly:
______________________________________________________________________________
_____________
$1000
March 15

March 16

June 15

Do you see a pattern here?

Compound Interest Formula:
nt

r
A ( t ) =P(1+ )
n

Monthly (Use the formula):

Sept 15

Dec 15

Algebra II12.5 Compound & Continuously Compounding Interest Notes

P=
r (remember, r = percentage rate/100):
t=
n=
Which option would make you the most money?
_________________________________________________
Now imagine the bank offers you a deal in which they compound the interest
every day. Would you take it? Why or why not?
_______________________________________________________________
______________________________________________________________________________
__________________________.
What about every hour? Every minute? Every second?
When the increments of time get smaller and smaller, we use a different
formula. This type of interest is called
______________________________________________________________________________
____.
Continuously compounding interest formula:
A ( t ) =P e rt
Example 1: An amount of $2,340.00 is deposited in a bank paying an
annual interest rate of 3.1%, compounded continuously. Find the balance
after 3 years.
P=
e=
r=
t=
You Try 1: If you invest $2,000 at an annual interest rate of 13%
compounded continuously, calculate the final amount you will have in the
account after 20 years.

Algebra II12.5 Compound & Continuously Compounding Interest Notes

P=
e=
r=
t=
You Try 2: An initial deposit of $5000 is made into an account that earns
7.1% interest compounded continuously. How much is in the account after 10
years, if no deposits or withdrawals are made?
P=
e=
r=
t=