Compound Interest Worksheets

Understanding Compound Interest

It has been said that compound interest is the eighth wonder of the world; a force so powerful that a few dollars, and enough time, can grow into a fortune. Learning to harness the power of compound interest for yourself and your family is one of the big secrets to achieving financial independence.

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Compound interest is interest paid on both the principal sum and the earned interest of any loans from past years—basically, interest on interest. It is most often used when reinvesting the earnings from interest gained back into the original investment but is important to understand when making investments or repaying loans in order to make the most profit from interest on such investments.

For example, if a person got 15% interest on a $1000 investment the first year—totalling $150—and reinvested the money back into the original investment, then in the second year, the person would get 15% interest on $1000 and the $150 that was reinvested.

Over time, this compound interest would make much more money than simple interest or cost much more on a loan, depending on which compound interest you're trying to determine.

The formula used to calculate compound interest is M = P( 1 + i )n where M is the final amount including the principal, P is the principal amount, i is the rate of interest per year, and n is the number of years invested.

Understanding how compound interest is calculated is important to determine payments for loans or to determine the future values of investments. These worksheets provide various terms, interest rates and principal amounts to help you practice applying the compound interest formulas. Prior to working with compound interest word problems, one should be comfortable working with decimals, percentages, simple interest and the vocabulary terms associated with interest.

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Compound Interest Worksheet #1

Print this compound interest worksheet as a test for understanding the formula associated with making investments and taking out loans with certain compound interest rates associated with them.

The worksheet requires students to fill out the above formula with varying factors including the principal loan or investment, the rate of interest, and the number of years of investment.

You can review the compound interest formulas to help you determine what you need to calculate the answers to the various compound interest word problems. Another option to calculators and the old fashion pencil/paper for calculating compound interest problems is to use a spreadsheet which has the PMT function built in.

Alternatively, the United States Securities and Exchanges Commission also has a handy calculator for helping investors and loan recipients calculate their compound interest.

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Compound Interest Worksheet #2

The second Compound Interest Worksheet continues the same line of questioning and can be downloaded as a PDF or printed from your browser; answers are presented on the second page.

Financial institutions use compound interest to calculate the amount of interest paid to you on money or the amount of interest you will owe for a loan. This worksheet focuses on word problems for compound interest including discussion of compounding interest semiannually, meaning that every six months the interest compounds and is reinvested.

For example, if a person deposits $200 in one-year investment that paid interest at the rate of 12% compounded semi-annually, that person would have $224.72 after one year.

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Compound Interest Worksheet #3

The third compound interest worksheet also presents answers on the second page of the PDF and features a variety of more complex word problems associated with different investment scenarios.

This worksheet provides practice using different rates, terms, and amounts for calculating compound interests, which may be compounded annually, semi-annually, quarterly, monthly or even daily!

These examples help young investors understand the value of not cashing out returns on interest and or getting loans with lower interest rates and fewer compounding periods to limit the final cost of repaying the loan including compounded interest.

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Compound Interest Worksheet #4

This compound interest worksheet again explores these concepts but delves deeper into how banks use formulas of compound interest much more frequently than simple interest, especially as it relates to loans taken out by businesses and individuals.

It is important to understand how to apply compound interest as you will find all banks use it on loans; a good way to visually understand how interest rates can affect such loans over the course of several years is to draw out a table of varying rates of interest on one fixed sum over a period of a fixed number of years.

A $10,000 loan repaid over the course of 10 years with a semiannual compounding interest of 10%, for instance, would be more expensive than one with an annual compounding interest of 11%.

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Compound Interest Worksheet #5

The final printable compound interest worksheet requires students to understand the compound interest formula for calculating over a period of several years with a fixed interest rate.

Finding the balances when calculating interest for each time period can be quite tedious, which is why we apply the compound interest formula: A = P(1 + i)n wherein A is the total amount in dollars, P is the principal in dollars, i is the rate of interest per period, and n is the number of interest periods.

With these core concepts in mind, veteran and novice investors and loan recipients alike can capitalize on their understanding of compound interest, allowing them to make the right decisions regarding which interest rates will most benefit them.