Lesson 4

Compound Interest

Recall that a pyramid scheme is a fraudulent money-making scam that cheats many people out of their money. Despite the existence of pyramid schemes and other scams, there are a large number of legitimate ways to invest your money. For example, you may invest your money in a savings account, Guaranteed Investment Certificate (GIC), or Canada Savings Bond to name a few. These investments pay compound interest.

In Try This 3 and Share 1 you derived the general term of a geometric sequence. Now you can derive the formula for evaluating compound interest. As you watch Deriving a Formula for Compound Interest, think about how you would answer the following questions:

1. How is compound interest an example of a geometric sequence? What is the first term? What is the common ratio?
   
   
2. How was the process of deriving the formula for compound interest similar to the process for deriving the general term of a geometric sequence?
   
   
3. How would you use the formula to determine the following?
   
   
   1. P
      
      
   2. i
      
      
4. How is the formula A = 800(1.1)n different from the general term tn = 800(1.1)n−1?

Share 2

With a classmate, answer the four questions you thought about as you watched Deriving a Formula for Compound Interest. Record your solutions and show support for your reasoning.

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