Personal financial literacy · TEKS 7.13E
Simple & compound interest
Simple interest is earned only on the starting amount. Compound interest also earns interest on past interest.
Key steps
- Simple interest: I = Prt (r as a decimal, t in years).
- Simple balance = P + I.
- Compound yearly: multiply by (1 + r) once for each year.
- Over time, compound interest always earns more.
Worked example
$1,000 at 5% for 2 years. Simple vs compound?
- Simple: 1,000 × 0.05 × 2 = $100, so the balance is $1,100.
- Compound: 1,000 × 1.05 × 1.05 = $1,102.50.
- Compound earns $2.50 more.
Watch out: Write 5% as 0.05, not 5.
Practice
5 questions with new numbers every set. Get 4 of 5 to mark this topic as practiced.