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Lesson 5.4 Compounding Interest Makes Cents LESSON 5.4 SPECIFIC OBJECTIVES Students will understand that . compounding is repeated multiplication by a compounding factor. compounding is best expressed in terms of exponential rowth, using exponential exponential growth models the compounding of interest on an initial investment Students will be able to calculate the earnings on a principal investment with annual compound interes write a formula for annual compound interest. compare and contrast linear and exponential models. PROBLEM SITUATION 1: THE FIVE-YEAR CD Suppose you invest $1,000 principal into a certificate of deposit (CD) with a five-year term that pays 2% annual percentage rate (APR) interest. The compounding period is one year. (1) How much money will you have in your account at the end of the five-year term? (Be ready to explain your calculations. Use the table below to find a pattern and develop a formula model for the total amount accrued in a CD with annual compounding after t years, if the principal $1,000 and the APR = 2%. (Hint: recall the method of finding the percent increase in one step from lesson 1.2) Calculation Amount Accrued Term 1 year 2 years 3 years 4 years 5 years t years (2) Is your formula from Question 1 linear? Explain your reasoning