Topic 6 Compounding Interest Review

Front

What is compound interest?

Back

Compound interest is the interest on a loan or deposit calculated based on both the initial principal and the accumulated interest from previous periods.

Front

How is compound interest different from simple interest?

Back

Compound interest is calculated on the initial principal and also on the accumulated interest of previous periods, while simple interest is calculated only on the principal amount.

Front

What is the formula for calculating compound interest?

Back

The formula for compound interest is A = P(1 + r/n)^(nt), where A is the amount of money accumulated after n years, P is the principal amount, r is the annual interest rate (decimal), n is the number of times that interest is compounded per year, and t is the number of years.

Front

What does 'compounded monthly' mean?

Back

Compounded monthly means that the interest is calculated and added to the principal balance once every month.

Front

What does 'compounded semi-annually' mean?

Back

Compounded semi-annually means that the interest is calculated and added to the principal balance twice a year.

Front

What does 'compounded continuously' mean?

Back

Compounded continuously means that the interest is calculated and added to the principal balance an infinite number of times per year, leading to the formula A = Pe^(rt), where e is Euler's number.

Front

How do you convert a percentage interest rate to a decimal?

Back

To convert a percentage interest rate to a decimal, divide the percentage by 100. For example, 6.75% becomes 0.0675.

Front

What is the effect of a higher interest rate on compound interest?

Back

A higher interest rate increases the amount of interest earned or paid over time, leading to a larger final amount when compounded.

Front

How does the frequency of compounding affect the total amount of interest earned?

Back

The more frequently interest is compounded, the more interest will be earned, as interest is calculated on previously accumulated interest.

Front

What is the principal amount in the context of compound interest?

Back

The principal amount is the initial sum of money deposited or invested before interest is applied.