Blog #4

The concept that I will be explaining in this post is the concept of  interest.

Interest is arguably one important concepts that we will learn in math because people will use this concept almost everyday for the rest of their lives. Interest is used by banks, credit card companies, in bonds, mortgages and so on. If you don't understand interest it can be incredibly easy to be ripped off, taken advantage of and become financially unstable.

There are two types of interest: Compound interest and Continuously compounded interest.

The best way to remember compound interest is that the interest is added only to the principle amount

The formula for compound interest is A= P(1+r/n)^nt.
 Where A=Amount
P= Principle
R= Rate
N= Frequency
T= Time

an example of compound interest would be that a bank will give 2% simple interest every quarter for 5 years. How much will you make if you deposit $5,000?

The answer is A=5000(1+.02/4)^4x5 = $5,524.48. This means you will be paid $524.48 by the bank to deposit $5,000!

You divide by 4 in this situation because there are 4 periods in the year in which the bank will give you interest. You also multiply these 4 periods by 5 because over 5 years you will be given interest 20 times!

This is very easy to remember because it essentially just the interest rate divided by the number of times it is factored in a year raised to that same number multiplied by the time period of the problem.


The next type of interest is continuously compounded interest. To find this all you need is to use the formula A=Pe^rt

Where A=Amount
e=A mathematical concept
R=Rate
T= Time

An example of this would be a credit card company charges 5% interest compounded continuously. You buy a pair of shoes for $50 If you don't pay off your bill for 3 years, how much money in interest will you be charged?

A=50e^.05x3 = $58.09. This means you will be charged $8.09 in interest so those shoes won't actually cost you $50!

It is easy to remember this formula because all you have to remember is that continuously compounded interest is equal to the word PERT, which is the formula for continuously compound interest.