This Math quiz is called 'Consumer Math (Calculating Compound Interest to the Whole Dollar)' and it has been written by teachers to help you if you are studying the subject at middle school. Playing educational quizzes is a fabulous way to learn if you are in the 6th, 7th or 8th grade - aged 11 to 14.
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Do you remember what “interest” is in the monetary world of saving and borrowing? Interest is the amount of extra money you earn or you have to pay back. On savings, you earn, while on loans and credit, such as credit cards, you pay back. Both are paid on the base value of what was saved or loaned. This base value is known as the principal.
There are two basic forms of interest, i.e., simple interest and compound interest. For this quiz you will only be dealing with compound interest.
What is compound interest?
Well first let’s refresh on what simple interest is. The formula to calculate simple interest is I = PRT (interest equals principal, interest rate and time). In essence, when you receive simple interest you only earn or pay interest on the principal balance. So if you had $10,000.00 in savings and it earns 4% interest each year, no matter what month it is in, you are still only earning interest on the $10,000.00 even if the amount in the account is now $10,140.00 with $140.00 being interest earned to date. This is a good thing but compound interest is even better. Why?
With compound interest you not only earn interest on the principal balance but you also earn interest on the interest earnings. In order to calculate compound interest we have a new formula to follow. It is: A = P(1 + r)t.
A = The amount of money (including the accrued interest) after __ years/months or the compound amount
P = The principal saved or owed
r = The interest rate earned per year
t = The time period of the loan or amount saved (notice that the time is put into the “power” position)
So let’s use some real numbers here. You are going to borrow $500.00 at an interest rate of 2.65% for 2 years. Using the compound interest formula that will read as follows:
A = 500(1 + .0265)2
500(1.0265)2
(1.0265 x 1.0265 = 1.054)
500 x 1.054 = 527
$27.00 is the compound interest over two years and
A = $527.00 as the full amount that will have to be paid back over the two years.
Okay, let’s tackle the next ten problems. For each problem find out how much compound interest will need to be paid or earned and how much in total will be paid back or will be in savings. (Round decimals to the nearest 100th.)
700(1 + .12)1
(1 + .12)1 = (1.12)
700 x 1.12 = $784.00 (is the amount in savings after 1 year)
$784.00 - $700.00 = $84.00 (is the compound interest earned over 1 year)
Solution: Mitch will earn $84.00 in compound interest in 1 year and the full amount in his checking will be $784.00.
Answer (d) is the correct answer